Important Notice the Offering Memorandum

IMPORTANT NOTICE

THE OFFERING MEMORANDUM (THE “OFFERING MEMORANDUM”) FOLLOWING THIS PAGE IS INTENDED SOLELY FOR (i) QUALIFIED INSTITUTIONAL BUYERS (“QIBs”) UNDER RULE 144A OF THE U.S. SECURITIES ACT OF 1933 (AS AMENDED, THE “SECURITIES ACT”) AND (ii) NON-U.S. PERSONS LOCATED OUTSIDE OF THE UNITED STATES AND THAT ARE NOT ACQUIRING THE NOTES FOR THE ACCOUNT OR BENEFIT OF A U.S. PERSON IN RELIANCE ON REGULATION S OF THE SECURITIES ACT.

IMPORTANT: You must read the following before continuing. The following applies to the offering memorandum following this page, and you are therefore advised to read this carefully before reading, accessing or making any other permitted use of the offering memorandum. In accessing the offering memorandum, you agree to be bound by the following terms and conditions, including any modifications to them any time you receive any information from us as a result of such access.

NOTHING IN THIS ELECTRONIC TRANSMISSION OR IN THE OFFERING MEMORANDUM CONSTITUTES AN OFFER OF SECURITIES IN ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE SECURITIES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE SECURITIES ACT, OR THE SECURITIES LAWS OF ANY STATE OF THE U.S. OR OTHER JURISDICTION AND THE SECURITIES MAY NOT BE OFFERED OR SOLD WITHIN THE U.S. OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT), EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIES LAWS.

THE OFFERING MEMORANDUM MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON AND MAY NOT BE REPRODUCED IN WHOLE OR IN PART IN ANY MANNER WHATSOEVER. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT IN WHOLE OR IN PART IS UNAUTHORIZED, AND FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS.

CONFIRMATION OF YOUR REPRESENTATION: in order to be eligible to view the offering memorandum or make an investment decision with respect to the securities, investors must be either (1) QIBs within the meaning of Rule 144A under the Securities Act or (2) non-U.S. persons (as defined in Regulation S under the Securities Act). The offering memorandum is being sent at your request and by accepting the e-mail and accessing the offering memorandum, you shall be deemed to have represented to us that (1) you and any customer you represent are either (a) QIBs or (b) not a U.S. person and that the electronic mail address that you gave us and to which this e-mail has been delivered is not located in the U.S. and (2) that you consent to delivery of such offering memorandum by electronic transmission and agree to comply with the terms, conditions and restrictions provided herein.

You are reminded that the offering memorandum has been delivered to you on the basis that you are a person into whose possession the offering memorandum may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not, nor are you authorized to, deliver the offering memorandum to any other person. OFFERING MEMORANDUM CompanhiadeSaneamentoBásicodoEstadodeSãoPaulo— SABESP (incorporated in the Federative Republic of Brazil)

US$350,000,000 6.250% Notes due 2020 ______We are offering US$350,000,000 aggregate principal amount of 6.250% senior unsecured notes due 2020. Interest on the notes will accrue from December 16, 2010 at a rate of 6.250% per year and will be payable semiannually in arrears on June 16 and December 16, commencing on June 16, 2011. The notes will mature on December 16, 2020. The notes may, at our option, be redeemed in whole but not in part at 100% of their principal amount plus accrued interest and additional amounts, if any, at any time upon the occurrence of specified events relating to Brazilian tax law, as set forth in this offering memorandum. We may also redeem the notes, in whole or in part, on or after December 16, 2015, at the prices set forth in this offering memorandum, provided that at least US$150,000,000 aggregate principal amount of the notes must remain outstanding following any partial redemption. The notes will be senior unsecured obligations and will rank pari passu with our other existing and future unsecured, unsubordinated indebtedness. Application has been made to admit the notes to listing on the Official List of the Luxembourg Stock Exchange (“Luxembourg Stock Exchange”) and to trade the notes on the Euro MTF Market of the Luxembourg Stock Exchange (“Euro MTF Market”). The Euro MTF Market is not a regulated market for the purposes of Directive 2004/39/EC of the European Parliament and of the Council of April 21, 2004 on markets in financial instruments. This offering memorandum constitutes a prospectus for the purpose of the Luxembourg law dated July 10, 2005, on prospectuses for securities. ______Investing in the notes involves risks. See “Risk Factors” beginning on page 13. The notes have not been and will not be registered under the U.S. Securities Act of 1933, as amended ( “Securities Act”), or any state securities laws and may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S under the Securities Act), except in transactions exempt from the registration requirements of the Securities Act. Accordingly, the notes are being offered and sold within the United States only to qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the United States to non-U.S. persons in accordance with Regulation S under the Securities Act. Prospective purchasers that are qualified institutional buyers are hereby notified that the seller of the notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. For a description of certain restrictions on transfer of the notes, see “Notice to Investors”. This offering memorandum has not been approved by a competent authority within the meaning of Directive 2003/71/EC of the European Union. ______Price per note: 99.086% plus accrued interest, if any, from December 16, 2010 ______The initial purchasers expect to deliver the notes to purchasers in book-entry form through the facilities of The Depository Trust Company, New York, New York (“DTC”) on December 16 , 2010. Itaú Santander

The date of this offering memorandum is December 9, 2010

You should rely only on the information contained in this offering memorandum. We have not authorized anyone to provide you with different information. Neither we nor the initial purchasers are making an offer of the notes in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this offering memorandum is accurate as of any date other than the date on the front cover of this offering memorandum.

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION ...... v FORWARD-LOOKING STATEMENTS...... vii SUMMARY ...... 1 RISK FACTORS...... 13 USE OF PROCEEDS...... 27 EXCHANGE RATES ...... 28 CAPITALIZATION...... 29 SELECTED FINANCIAL AND OPERATING INFORMATION...... 30 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 33 BUSINESS...... 66 MANAGEMENT ...... 121 PRINCIPAL SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...... 128 DESCRIPTION OF THE NOTES ...... 135 TAXATION ...... 161 CERTAIN ERISA AND OTHER CONSIDERATIONS...... 167 NOTICE TO INVESTORS...... 169 ENFORCEMENT OF CIVIL LIABILITIES...... 172 PLAN OF DISTRIBUTION ...... 174 LEGAL MATTERS ...... 178 INDEPENDENT ACCOUNTANTS...... 178 AVAILABLE INFORMATION ...... 178 LISTING AND GENERAL INFORMATION ...... 179 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ...... F-1 ANNEX A — SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN BRAZILIAN GAAP AND IFRS...... A-1

In this offering memorandum, unless the context otherwise requires, references to “we,” “us,” “our,” “Company” or “SABESP” refer to Companhia de Saneamento Básico do Estado de São Paulo—SABESP. “Brazil” refers to the Federative Republic of Brazil, and “State” refers to the State of São Paulo, which is also our controlling shareholder. The terms “federal government” and “Brazilian government” refer to the federal government of the Federative Republic of Brazil and “State government” refers to the state government of the State of São Paulo. The term “Central Bank” refers to the Banco Central do Brasil, or the Central Bank of Brazil.

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i IMPORTANT INFORMATION

This offering memorandum has been prepared by us solely for use in connection with the proposed offering of the notes described in this offering memorandum and the listing of the notes on the Luxembourg Stock Exchange and trading of the notes on the Euro MTF Market. This offering memorandum is personal to each offeree and does not constitute an offer to any other person or to the public generally to subscribe for or otherwise acquire notes.

Notwithstanding anything in this offering memorandum to the contrary, each prospective investor (and each employee, representative or other agent of the prospective investor) may disclose to any and all persons, without limitation of any kind, the U.S. tax treatment and U.S. tax structure of any offering and all materials of any kind (including opinions or other tax analyses) that are provided to the prospective investor relating to such U.S. tax treatment and U.S. tax structure, other than any information for which nondisclosure is reasonably necessary in order to comply with applicable securities laws.

The initial purchasers make no representation or warranty, express or implied, as to the accuracy or completeness of the information contained in this offering memorandum. Nothing contained in this offering memorandum is, or shall be relied upon as, a promise or representation by the initial purchasers as to the past or future. We have furnished the information contained in this offering memorandum regarding us and the notes. Notwithstanding any investigation that the initial purchasers may have conducted with respect to the information contained herein, the initial purchasers assume no responsibility for the accuracy or completeness of any such information.

None of the U.S. Securities and Exchange Commission ( “SEC”), any state securities commission or any other regulatory authority has approved or disapproved the notes nor have any of the foregoing authorities passed upon or endorsed the merits of this offering or the accuracy, adequacy or completeness of this offering memorandum. Any representation to the contrary is a criminal offense.

The notes are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the Securities Act and the applicable state securities laws pursuant to registration thereunder or exemption therefrom. As a prospective purchaser, you should be aware that you may be required to bear the financial risks of this investment for an indefinite period of time. Please refer to the sections in this offering memorandum entitled “Plan of Distribution” and “Notice to Investors”.

In making an investment decision, prospective investors must rely on their own examination of our business and the terms of the offering, including the merits and risks involved. Prospective investors should not construe anything in this offering memorandum as legal, business or tax advice. Each prospective investor should consult its own advisors as needed to make its investment decision and to determine whether it is legally permitted to purchase the notes under applicable legal investment or similar laws or regulations.

This offering memorandum contains summaries believed to be accurate with respect to certain documents, but reference is made to the actual documents for complete information. All such summaries are qualified in their entirety by such reference. Copies of documents referred to herein will be made available to prospective investors upon request to us or the initial purchasers.

We confirm that, after having made all reasonable inquiries, this offering memorandum contains all information with regard to us and the notes which is material to the offering and sale of the notes, that the information contained in this offering memorandum is true and accurate in all material respects and is not misleading and that there are no omissions of any facts from this offering memorandum which, by their absence herefrom, make this offering memorandum misleading. We accept responsibility for the information contained in this offering memorandum regarding us and the notes. The opinions and intentions expressed in this offering memorandum regarding us and the notes are honestly held and based on reasonable assumptions.

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ii NOTICE TO NEW HAMPSHIRE RESIDENTS

NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.

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NOTICE ABOUT STABILIZATION ACTION

IN CONNECTION WITH THIS OFFERING, THE INITIAL PURCHASERS (OR PERSONS ACTING ON BEHALF OF THE INITIAL PURCHASERS) MAY OVER-ALLOT NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE INITIAL PURCHASERS (OR PERSONS ACTING ON BEHALF OF THE INITIAL PURCHASERS) WILL UNDERTAKE STABILIZATION ACTION. ANY STABILIZATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE OFFER OF THE RELEVANT NOTES IS MADE AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER THE ISSUE DATE OF THE RELEVANT NOTES AND 60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THE RELEVANT NOTES. ANY STABILIZATION ACTION OR OVER- ALLOTMENT SHALL BE CONDUCTED IN ACCORDANCE WITH ALL APPLICABLE LAWS AND RULES.

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NOTICE TO RESIDENTS OF BRAZIL

The notes have not been and will not be registered with the Comissão de Valores Mobiliários (“CVM”) the Brazilian securities commission. Any public offering or distribution, as defined under Brazilian laws and regulations, of the notes in Brazil is not legal without such prior registration. Documents relating to the offering of the notes, as well as information contained therein, may not be supplied to the public in Brazil, as the offering of the notes is not a public offering of securities in Brazil, nor may they be used in connection with any offer for subscription or sale of the notes to the public in Brazil.

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iii NOTICE TO RESIDENTS OF THE UNITED KINGDOM

This offering memorandum is only being distributed to, and is only directed at, persons in the United Kingdom that are qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive (“Qualified Investors”) that are also (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (“Order”) or (ii) high net worth entities, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”). This offering memorandum and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other persons in the United Kingdom. Any person in the United Kingdom that is not a relevant person should not act or rely on this document or any of its contents.

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NOTICE TO RESIDENTS OF THE EUROPEAN ECONOMIC AREA

This offering memorandum has been prepared on the basis that any offer of notes in any Member State of the European Economic Area which has implemented the Prospectus Directive (2003/71/EC) (each, a “Relevant Member State”) will be made pursuant to an exemption under the Prospectus Directive, as implemented in that Relevant Member State, from the requirement to publish a prospectus for offers of notes. Accordingly any person making or intending to make an offer in that Relevant Member State of notes which are the subject of the offering contemplated in this offering memorandum may only do so in circumstances in which no obligation arises for the Issuer or any of the initial purchasers to publish a prospectus pursuant to Article 3 of the Prospectus Directive in relation to such offer. Neither the Issuer nor the initial purchasers have authorized, nor do they authorize, the making of any offer of notes in circumstances in which an obligation arises for the Issuer or the initial purchasers to publish a prospectus for such offer.

This offering memorandum and this offering are only addressed to and directed at persons in member states of the European Economic Area (“EEA”) who are “Qualified Investors” within the meaning of Article 2(1)(e) of the Prospectus Directive. The notes are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such securities will be engaged in only with Qualified Investors. This offering memorandum and its contents should not be acted upon or relied upon in any member state of the EEA by persons who are not Qualified Investors. For the purposes of this provision, the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

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INTERNAL REVENUE SERVICE CIRCULAR 230 DISCLOSURE

PURSUANT TO INTERNAL REVENUE SERVICE CIRCULAR 230, WE HEREBY INFORM YOU THAT THE DESCRIPTION SET OUT HEREIN WITH RESPECT TO U.S. FEDERAL TAX ISSUES WAS NOT INTENDED OR WRITTEN TO BE USED, AND SUCH DESCRIPTION CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER UNDER THE U.S. INTERNAL REVENUE CODE. SUCH DESCRIPTION WAS WRITTEN IN CONNECTION WITH THE PROMOTION OR MARKETING OF THE NOTES. TAXPAYERS SHOULD SEEK ADVICE BASED ON THE TAXPAYER’S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

iv PRESENTATION OF FINANCIAL AND OTHER INFORMATION

In this offering memorandum, references to “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “U.S. dollars” or “US$” are to the United States dollar, the official currency of the United States. Solely for the convenience of the reader, we have translated certain amounts included in “Summary — Summary Financial and Operating Information,” “Capitalization,” “Selected Financial and Operating Information” and elsewhere in this offering memorandum from reais into U.S. dollars using the commercial selling rate as reported by the Central Bank at September 30, 2010 of R$1.6942 to US$1.00. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate. See “Exchange Rates”.

Consolidated Financial Statements

We maintain our books and records in reais. We prepared our consolidated financial statements as of and for the years ended December 31, 2007, 2008 and 2009 and as of September 30, 2010 and for the nine months ended September 30, 2010 and 2009 included elsewhere in this offering memorandum in accordance with accounting practices adopted in Brazil (“Brazilian GAAP”). Brazilian GAAP is based on:

 the provisions of Brazilian Corporate Law No. 6,404/76, including the provisions of Law No. 11,638/07, as amended by Provisional Measure (MP) 449 of December 4, 2008, which was codified into Law No. 11,941/09;

 for public companies such as us, the rules and regulations issued by the Brazilian Securities Commission (Comissão de Valores Mobiliários), or the CVM, including those that approve and give effectiveness to the accounting standards issued by the Accounting Pronouncements Committee (Comitê de Pronunciamentos Contábeis) (“CPC”); and

 certain accounting standards issued by the Brazilian Institute of Independent Auditors (Instituto dos Auditores Independentes do Brasil) (“IBRACON”) and by the Federal Accounting Council (Conselho Federal de Contabilidade) ( “CFC”).

Changes in Brazilian GAAP

In 2008 and 2009, the CPC issued over 40 standards, interpretations and application guidance documents, in order to converge Brazilian GAAP to International Financial Reporting Standards (“IFRS”), except in a limited number of areas in which there are legal restrictions preventing complete convergence. Such legal restrictions do not prevent consolidated Brazilian GAAP financial statements from complying with IFRS, but limit certain options permitted by IFRS. The new Brazilian accounting rules became effective for year-end financial statements relating to any fiscal year starting as of or after January 1, 2008 and have been applied to our consolidated financial statements as of and for the years ended December 31, 2007, 2008 and 2009 and as of September 30, 2010 and for the nine months ended September 30, 2010 and 2009.

The CVM has approved the standards and has mandated that public companies comply with all the standards beginning with annual financial statements as of and for the year ending December 31, 2010. The CVM, however, has allowed public companies to present quarterly financial information and interim financial statements in 2010 under accounting practices adopted in Brazil that were in effect in 2009. Pursuant to applicable regulations, since we are presenting quarterly financial information in 2010 under accounting practices adopted in Brazil in 2009, we will be required to republish this information in conformity with the standards effective for the year ending December 31, 2010 before we publish our annual financial statements as of and for the year ended December 31, 2010. Upon republishing our quarterly financial information for 2010, we will also be required to republish all comparative information presented (including comparative information for 2009) in conformity with the standards.

We are currently evaluating possible adjustments resulting from the standards that may affect our financial statements.

v For a discussion of the potential impact of these changes on the financial covenants under our outstanding indebtedness, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Liquidity and Capital Resources—Capital Sources—Financial Covenants”.

Brazilian GAAP differs in significant respects from IFRS, as issued by the International Accounting Standards Board (“IASB”). Our consolidated financial statements prepared in accordance with Brazilian GAAP contained in this offering memorandum would differ from those prepared under IFRS, including the consolidated financial statements prepared under IFRS included in our annual report on Form 20-F filed with the SEC. No reconciliation to IFRS for any of the consolidated financial statements presented in this offering memorandum has been prepared for the purpose of this offering of notes. There can be no assurance that reconciliations would not identify material quantitative differences as well as disclosures and presentation differences between the consolidated financial statements included in this offering memorandum, as prepared in accordance with Brazilian GAAP, and the consolidated financial statements as prepared under IFRS. See “Annex A—Summary of Principal Differences Between Brazilian GAAP and IFRS” for a discussion of the principal differences between Brazilian GAAP and IFRS.

Market Share and Other Information

We make statements in this offering memorandum about our market share and other information relating to Brazil and industry in which we operate. We have made these statements on the basis of information obtained from third-party sources and publicly available information that we believe is reliable, such as information and reports from the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística) (“IBGE”) and the State System Foundation Data Analysis (Fundação Sistema Estadual de Análise de Dados) (“SEADE”) among others. Notwithstanding any investigation that we and the initial purchasers may have conducted with respect to the market share, market size or similar data provided by third parties or derived from industry or general publications, we and the initial purchasers assume no responsibility for the accuracy or completeness of any such information.

In this offering memorandum, the “São Paulo metropolitan region” refers to the area where the Metropolitan executive office operates, comprising 38 municipalities, including the city of São Paulo; and the term “Regional systems” refers to the area where the Regional systems executive office operates, comprising 326 municipalities in the interior and coastline regions of the State of São Paulo. References to “water coverage ratio” in this offering memorandum are to the ratio between the number of residences connected to the water supply network, divided by the number of urban residences in a certain area; and references to “sewage coverage ratio” are to the ratio between the number of residences connected to the sewage collection network, divided by the number of urban residences in a certain area.

References to urban and total population in this offering memorandum are estimated based on research by the SEADE: “Projections for the State of São Paulo – Population and Residences until 2025” (Projeções para o Estado de São Paulo – População e Domicílios até 2025).

Information in this offering memorandum related to liters, water and sewage volumes, number of employees, kilometers, water and sewage connections, population served, operating productivity, water production rate, sewage lines (in kilometers), savings achieved and investment in improvement programs has not been audited.

Rounding

Certain figures included in this offering memorandum have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.

vi FORWARD-LOOKING STATEMENTS

This offering memorandum contains forward-looking statements. Some of the matters discussed concerning our business operations and financial performance include forward-looking statements within the meaning of the Securities Act or the U.S. Securities Exchange Act of 1934, as amended (“Exchange Act”).

Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” and similar expressions are forward-looking statements. Although we believe that these forward-looking statements are based upon reasonable assumptions, these statements are subject to numerous risks and uncertainties and are made in light of information currently available to us.

Our forward-looking statements may be influenced by factors, including the following:

• general economic, political and other conditions in Brazil and in other emerging market countries;

• existing and future governmental regulation, including taxes on, and charges to, us;

• changes to tax laws in Brazil;

• inflation and currency devaluation in Brazil;

• the interests of our controlling shareholder;

• our ability to collect amounts owed to us by our controlling shareholder and by municipalities;

• our ability to continue to use certain reservoirs under current terms and conditions;

• our capital expenditure program and other liquidity and capital resources requirements;

• changes in Brazilian environmental laws;

• droughts, water shortages and climate events;

• power shortages or rationing in energy supply or significant changes in energy tariffs;

• the effects of the agreement for provision of water and sewage services in the city of São Paulo that we recently executed with the State and the city of São Paulo;

• our lack of formal agreements with certain municipalities to which we render our water and sewage services, including the cities comprising the São Paulo metropolitan region (except in the municipality of São Paulo);

• the right of municipalities to terminate our existing concession agreements prior to their expiration date and our ability to renew such agreements;

• our ability to provide water and sewage services in additional municipalities and to maintain rights to provide currently contracted services;

• the size and growth of our customer base;

• our ability to maintain universalization of water coverage in the municipalities to which we provide water services and to increase sewage coverage in the municipalities to which we provide sewage services;

vii • our level of indebtedness and limitations on our ability to incur additional indebtedness;

• our ability to access financing with favorable terms in the future;

• our costs relating to compliance with environmental laws and potential penalties for failure to comply with these laws;

• the outcome of our pending or future legal proceedings;

• our management’s expectations and estimates relating to our future financial performance;

• the regulation issued by the São Paulo State Sanitation and Energy Regulatory Agency (“ARSESP”) regarding several aspects of our business, including limitations on our ability to adjust our tariffs; and

• other factors identified or discussed under “Risk Factors” in this offering memorandum.

Our forward-looking statements are not guarantees of future performance, and our actual results or other developments may differ materially from the expectations expressed in the forward-looking statements. As for forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainty of estimates, forecasts and projections. Because of these uncertainties, potential investors should not rely on these forward-looking statements.

We undertake no obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

viii SUMMARY

You should read the following summary together with the more detailed information regarding us and our consolidated financial statements and related notes appearing elsewhere in this offering memorandum.

Our Business

We believe we are one of the largest water and sewage service providers in the world (based on the number of customers in 2009), according to the 11th edition of Pinsent Masons Water Yearbook. We operate water and sewage systems in the State of São Paulo in which the city of São Paulo, Brazil’s largest city, is located. According to the IBGE, the State of São Paulo is Brazil’s most populous state and the state with the highest gross domestic product (“GDP”) in Brazil. For the year ended December 31, 2009 and the nine months ended September 30, 2010, we had consolidated net revenue from sales and services of R$6,730.5 million and R$5,357.4 million, respectively, and consolidated net income of R$1,373.9 million and R$1,074.1 million, respectively. For the same periods, we had Adjusted EBITDA of R$2,741.4 million and R$2,439.0 million, respectively, and Adjusted EBITDA margin of 40.7% and 45.5%, respectively. Our total consolidated assets was R$21,565.2 million and R$23,539.7 million and our total shareholders’ equity was R$10,527.6 million and R$11,601.7 million as of December 31, 2009 and September 30, 2010, respectively.

We provide water and sewage services to a broad range of residential, commercial, industrial and governmental customers in 364 of the 645 municipalities in the State of São Paulo, including the city of São Paulo. Substantially all of our concessions or program agreements have 30-year terms, while the rest have an undetermined term. From October 1, 2010 through 2030, 51 concessions will expire, which we will seek to replace with program agreements.

We also supply water on a wholesale basis to six municipalities (with a total estimated urban population of approximately 3.4 million) in the São Paulo metropolitan region and to the municipality of Sumaré (with a total estimated urban population of 240,000), in which we do not operate water systems. For the year ended December 31, 2009 and the nine months ended September 30, 2010, the São Paulo metropolitan region (including the municipalities to which we provide water on a wholesale basis) accounted for 75.6% and 74.6%, respectively, of our gross revenue from sales and services, and the Regional Systems accounted for 24.4% and 25.4%, respectively, of our gross revenue from sales and services.

As of September 30, 2010, we provided water services through 7.3 million water connections to approximately 23.6 million people, representing approximately 60% of the urban population of the State of São Paulo, and effectively had a water coverage ratio of approximately 100% in respect of all regions. As of that date, we provided sewage services through 5.7 million sewage connections to approximately 19.9 million people and effectively had a sewage coverage ratio of 81%. As of August 31, 2010, we operated through 64,340 kilometers of water pipes and mains and through 43,405 kilometers of sewer lines.

The State, our controlling shareholder, is required by law to own at least 50% plus one of our common shares. As the date of this offering memorandum, the State owns 50.3% of our outstanding common shares. As a mixed capital company, we are an integral part of the State governmental structure. Our strategy and major policy decisions are formulated in conjunction with the State Secretariat for Sanitation and Energy as part of the overall strategic planning for the State. The majority of the members of our board of directors and our board of executive officers are nominated by the State Council for Protection of Capitals of the State (Conselho de Defesa de Capitais do Estado de São Paulo) (“CODEC”), a State agency presided over by the Secretary of the State Treasury (Secretaria da Fazenda) and reporting directly to the State governor.

In addition, our capital expenditure budget is subject to approval by the State legislature and is approved in conjunction with the budget of the State Secretariat for Sanitation and Energy as a whole. Our consolidated financial statements and accounting records are subject to review by the State Accounts Tribunal (Tribunal de Contas), as are all accounts of the State.

1 The table below sets forth certain summary financial information as of and for the dates and periods indicated:

As of or for the nine months ended As of or for the year ended December 31, September 30, 2007 2008 2009 2009 2009 2010 2010 (in millions of (in millions of (in millions of R$, (in millions of R$, except ratios) US$, except US$, except except ratios) ratios)(1) ratios)(1) Net revenue from sales and services ...... 5,970.8 6,351.7 6,730.5 3,972.6 4,906.0 5,357.4 3,162.2 Net income...... 1,055.3 63.6 1,373.9 810.9 916.6 1,074.1 634.0 Adjusted EBITDA(2) ...... 2,698.9 2,840.2 2,741.4 1.618,1 1,907.2 2,439.0 1,439.6 Adjusted EBITDA margin(3) ...... 45.2% 44.7% 40.7% 40.7% 38.9% 45.5% 45.5% Cash and cash equivalents...... 465.0 625.7 771.0 455.1 386.1 1,367.2 807.0 Total assets ...... 18,659.9 20,113.9 21,565.2 12,728.8 20,585.7 23,539.7 13,894.3 Total short-term loans and financing...... 742.1 1,448.9 1,010.5 596.4 1,619.4 1,163.6 686.8 Total long-term loans and financing...... 4,943.1 5,416.2 5,549.5 3,275.6 4,454.7 6,496.3 3,834.4 Net debt(4) ...... 5,220.2 6,239.4 5,789.0 3,417.0 5,688.0 6,292.8 3,714.3 Net debt to Adjusted EBITDA (5) ...... 1.93x 2.20x 2.11x 2.11x 2.15x(6) 1.92x (6) 1.92x (6)

(1) Amounts in reais have been translated for convenience only to U.S. dollars at an exchange rate of R$1.6942 per US$1.00, which was the commercial selling rate for U.S. dollars in effect on September 30, 2010, as reported by the Central Bank. (2) For a reconciliation of our Adjusted EBITDA to net income, see “— Summary Financial and Operating Information—Other Financial Information.” (3) Adjusted EBITDA as a percentage of net revenue from sales and services. (4) Loans and financing less cash and cash equivalents. (5) Ratio of net debt to Adjusted EBITDA. (6) Calculated based on Adjusted EBITDA for the twelve months ended September 30, 2009 and 2010.

Our Strengths

We believe that our strong business position and future prospects relate to the following strengths:

● Well-established business with significant size, scale and know-how to operate in complex urban settings. We believe we are one of the largest water and sewage service providers in the world. We provide water services directly to approximately 23.6 million people and supply water on a wholesale basis to an additional urban population of 3.6 million people, including the municipality of Sumaré. As of September 30, 2010, we effectively had a water coverage ratio of approximately 100% in respect of all regions in which we operate. We also provide sewage services directly to approximately 19.9 million people, achieving a sewage coverage ratio of 81% in respect of all regions in which we operate as of September 30, 2010. During the nine months ended September 30, 2010, our net revenue from sales and services increased by 9.2% as compared to the nine months ended September 30, 2009. Our significant size and scale have required us to operate in complex urban settings such as favelas (shantytowns) and environments without urban planning, which has enabled us to develop skills to operate in adverse conditions and have well trained personnel and a specialized structure that we believe our competitors lack.

● Operations in Brazil’s most populous and wealthy state. The State of São Paulo, part of the most developed and economically active region of Brazil, is the most populous state in Brazil, with an estimated population of 42.8 million as of September 30, 2010. The city of São Paulo had an estimated population of 11.0 million as of that date, with 20.4 million inhabitants in the São Paulo metropolitan region. Based on its GDP, the State of São Paulo is the wealthiest state and largest economy in Brazil. The GDP of the State of São Paulo was approximately R$1,003.0 billion in 2008, representing approximately 33% of Brazil’s total GDP. The State of São Paulo generates more revenue from water and sewage services than any other Brazilian state.

● High quality operations. We believe that we adhere to high standards of service and utilize the best available technology in the sanitation business to control the quality of the water captured, produced and distributed. All 16 of our water quality control laboratories operate in accordance with NBR ISO 9001, which follows the highest international standards. Of our 16 laboratories, 15 are accredited by the National Institute of Metrology, Standardization and Industrial Quality (“INMETRO”), thereby helping to assure the quality and accuracy of our test results, according to NBR/IEC ISO 17.025. Moreover, our laboratories and

2 field teams use the latest equipment to detect substances controlled by regulations and have highly trained personnel to handle contingencies and customer complaints. We believe our technology enhances the efficiency and quality of our operations.

● Access to low-cost and diverse sources of financing. Our strong cash flow generation from operations and our role as an essential public service provider place us in a privileged position in our industry to obtain low cost, long-term financing from Brazilian public banks and domestic and international multilateral agencies and development banks. In addition, we are not dependent upon a limited number of sources of financing. We benefit from various funding alternatives available in the Brazilian and international markets for our working capital needs and our capital expenditure programs.

● Strong corporate governance practices. In 2002, we joined the Novo Mercado listing segment of the São Paulo Stock Exchange (BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros) (“BM&FBOVESPA”), which is the listing segment in Brazil with the highest corporate governance requirements. Our American depositary shares are also listed on the New York Stock Exchange. As a result, we are committed to maintaining certain additional corporate governance practices that are not required by Brazilian law, affording additional protection to our shareholders’ rights and enhancing the quality of information we disclose to the market. On December 1, 2007, we became part of the BM&FBOVESPA Corporate Sustainability Index (“ISE”) which reflects our high degree of commitment to sustainable environmental and social practices.

Our Strategy

Our mission is to provide sanitation services, contributing to the improvement of the quality of life and of the environment. To this end, our strategic objectives are based upon the guiding principles of growth, quality, universalization of sanitation services and social, economic and environmental sustainability. We also base our strategic objectives on our political and institutional relationships as well as on our commitment to the market to increase shareholder value. We seek to implement these guiding principles through the following strategies:

● Reduce operating costs and increase productivity and profitability. We intend to use our best efforts to reduce operating costs and increase productivity and profitability. To achieve this goal, we plan to improve the management of our assets, as well as to continue to reduce our total salary and payroll expenses by decreasing the number of our employees, automating some of our operations, streamlining operational processes, implementing integrated planning and further investing in internal technological research and development. We also plan to continue our efforts to improve our collection of overdue accounts receivable from municipalities to which we provide services, from the State and from other governmental entities, including by exploring opportunities to offset these outstanding debts against certain possessory or property rights over utilities relating to water and sewage systems.

● Continue to prudently manage our levels of indebtedness. We intend to continue to fund our working capital needs and estimated capital expenditure programs with diversified sources of financing, such as Brazilian public banks, domestic and international multilateral agencies and development banks. We will continue to seek market opportunities for low-cost financing and restructuring of our indebtedness if and when advantageous and appropriate. Our total financial indebtedness decreased by 4.4%, from R$6,865.1 million as of December 31, 2008 to R$6,560.0 million as of December 31, 2009. In addition, during the same period, our total foreign denominated indebtedness decreased 23.5%, from R$2,281.0 million as of December 31, 2008 to R$1,746.4 million as of December 31, 2009, as a result of the appreciation of the real relative to the U.S. dollar and amortization payments relating to certain foreign currency-denominated indebtedness.

3 Development (Banco Nacional de Desenvolvimento Econômico e Social (“BNDES”). During 2012 and 2013 the program will be funded by a loan granted by the government of Japan through the Japan International Cooperation Agency (“JICA”). The program’s focus is on the renewal of our water distribution infrastructure and the improvement of maintenance and control services as a means of reducing physical water losses. We are also seeking to reduce physical water losses by creating smaller water supply districts through the construction of district metering areas (“DMAs”) that reduce the system’s pressure and pipe bursts, allowing leaks to be detected and repaired more efficiently. The program also seeks to reduce non-physical water losses by upgrading and replacing inaccurate water meters and through inspections of non-authorized water consumption in water service connections.

● Ensure the quality and availability of our services in our existing service area. Our goal is to maintain an effective water coverage ratio of approximately 100%, coupled with a high standard of quality and availability. We intend to continue to maintain an effective water coverage ratio of approximately 100% and meet the expected population growth by adding 1.4 million water connections by 2018. We also intend to increase our sewage coverage ratio to 90% by 2018, by adding 1.6 million sewage connections. To ensure the quality and availability of our services, we also intend to improve customer relations by shortening response times for customer installations as well as through a focused public relations program to enhance our image. In addition, we are also developing short, medium and long-term marketing strategies, such as client segmentation and tailor-made solutions for each type of client, which we believe will help us increase our customer base.

● Maintain and continue to expand our existing service areas. We intend to maintain our operating base through the execution of new agreements. To this end, we are actively seeking to develop closer relationships with the municipal governments that we currently serve in order to increase customer loyalty and thereby renew all or substantially all of our expiring concession agreements. We have recently entered into an agreement with the State and city of São Paulo with a 30-year term for the provision of water and sewage services in the city of São Paulo, which in the year ended December 31, 2009 and the nine months ended September 30, 2010, accounted for 55.6% and 54.2%, respectively, of our gross revenues. Between January 1, 2007 and September 30, 2010, we entered into 198 program agreements with 30-year terms with municipalities (including our services agreement with the city of São Paulo), of which 14 were entered into in 2009 and 24 were entered into in the nine months ended September 30, 2010. These 198 municipalities accounted for 65.0% and 64.2% of our total revenues for the year ended December 31, 2009 and the nine months ended September 30, 2010, respectively, and 55.2% and 54.0% of our total assets as of December 31, 2009 and as of September 30, 2010, respectively. As of September 30, 2010, 92 of our concession agreements had expired and are presently under renegotiation. These 92 municipalities accounted for 12.1% and 4.1% of our total revenues for the year ended December 31, 2009 and the nine months ended September 30, 2010, respectively, and 12.6% and 13.1% of our total assets as of December 31, 2009 and September 30, 2010, respectively. From October 1, 2010 through 2030, 51 concession agreements accounting for 8.1% and 8.1% of our total revenues for the year ended December 31, 2009 and the nine months ended September 30, 2010, respectively, and 5.5% and 5.6% of our total assets as of December 31, 2009 and September 30, 2010, respectively, will expire.

We have also developed a platform to offer unique services relating to sustainability, environmental preservation and water resource management to our large industrial, commercial and residential customers in order to encourage these customers to continue to use our water services. We also intend to continue to expand our sewage services. A significant portion of our capital expenditure program, which totals approximately R$8.6 billion between 2009 and 2013, is designed to achieve this goal. We also regularly explore the possibility of executing agreements for the provision of water and sewage services in municipalities of the State of São Paulo in which we currently have no operations or to which we currently supply water and provide sewage treatment solely on a wholesale basis, representing a total population of approximately 16.6 million. We evaluate possible expansion opportunities in terms of proximity to our existing service areas to maximize return on investment and improve our financial performance. We also intend to study, and take advantage of, opportunities in other Brazilian states and in other countries to expand our services and increase our market share.

4 ● Expand our water and sewage services. We had a sewage coverage ratio of 81.0% as of September 30, 2010, and we plan to increase our sewage coverage ratio to 90.0% by 2018, by adding over 1.6 million sewage connections. In addition, there are municipalities in the State of São Paulo representing an aggregate population of approximately 16.6 million to which we currently do not provide water or sewage services, or to which we currently supply water solely on a wholesale basis. Our strong presence in the State and experience in providing water and sewage services place us in a privileged position to expand our sewage services to municipalities in which we provide only water services and our water and sewage services to municipalities in which we do not yet operate, in both the State of São Paulo and also in other states of Brazil and abroad. Further, we seek to deepen our relationships with strategic clients that consume high volumes of water (more than 500 m3 per month) by applying special tariffs for these clients.

 Seek selective opportunities to expand our business. In 2007, a change in our by-laws expanded the scope of our corporate purpose to include activities complementary to our water and sewage services, such as urban rainwater management and drainage services, urban cleaning services and solid waste management services. Since then we have:  executed cooperation agreements to exchange technology with six regional basic sanitation companies in Brazil, with Mekorot National Water Company, an Israeli company, Sociedade General Aguas de Barcelona S/A – Agbar, a Spanish company, Instituto Costarricence de Acueductos y Alcantarillados, a Costa Rican company, and Empresa Pública de Medellin, a Colombian municipal multi-utilities company, which will allow us to exchange know-how and learn about future opportunities;  executed memoranda of understanding with three municipalities to study the possibility of operating landfills;  created four special purpose companies (SESAMM – Serviços de Saneamento de Mogi Mirim S/A; Águas de Castilho S.A.; Águas de Andradina S.A.; and Saneaqua Mairinque S.A.) to operate water and/or sewage concessions granted by four municipalities in the State of São Paulo. See “Business—Corporate Organization”;  organized a bidding process for the use of small hydroelectric power plants in our water treatment stations in Guaraú and Vertedouro Cascata;  executed an agreement with the basic sanitation company of the state of Alagoas to transfer technology for the reduction of water losses in the city of Maceió;  executed a service agreement with the basic sanitation company of the state of Espírito Santo to license the use of our proprietary software “Aqualog” designed to remotely monitor water treatment;  won an international public bidding process to render consulting services relating to a program for the rational use of water and for the implementation of a new model for commercial and operational management of the Instituto de Acueductos y Alcantarillados Nacionales, the company in charge of the water and sewage services in the central provinces of Panama; and  created a special purpose company (Aquapolo Ambiental S.A.), in partnership with a private sanitation services operator, to build and operate the largest water recycling facility in the southern hemisphere, which will supply up to 1,000 litres per second to industries in the São Paulo metropolitan region.

In addition, in connection with the expansion of our business, we are evaluating and may consider creating an investment vehicle, Sabesp Participações, through which we may make equity investments in the near future.

We intend to continue to selectively seek new business opportunities to take advantage of our know-how, size and scale.

We believe that our overall strategy will enable us to meet the demand for high quality water and sewage services in the State of São Paulo, in other Brazilian states and abroad, while strengthening our results of operations and our financial condition and creating shareholder value.

______

5 Our principal executive office is located at Rua Costa Carvalho, 300, 05429-900, São Paulo, SP, Brazil, and our telephone number at this address is 55-11-3388-8000. Our website is www.sabesp.com.br. The information included on our website or that might be accessed through our website should not be considered a part of, or incorporated by reference into, this offering memorandum.

6 Summary of the Offering

The following summary contains basic information about the notes and is provided solely for your convenience. This summary is not intended to be complete. You should read the full text and more specific details contained elsewhere in this offering memorandum. For a more detailed description of the notes, see “Description of the Notes”.

Issuer ...... Companhia de Saneamento Básico do Estado de São Paulo — SABESP.

Notes offered...... US$350.0 million aggregate principal amount of 6.250% notes due 2020.

Issue price ...... 99.086%.

Maturity Date ...... December 16, 2020.

Interest payment dates...... Payable semiannually in arrears on June 16 and December 16, commencing June 16, 2011.

Interest...... 6.250% per annum.

Ranking ...... The notes will be our senior unsecured obligations, ranking pari passu with our other existing and future unsecured, unsubordinated indebtedness. The notes will be effectively subordinated to our secured debt and could be structurally subordinated to debt of our subsidiaries. As of September 30, 2010, we had R$7,659.9 million of total debt, of which R$2,500.0 million was secured debt.

Optional redemption...... On and after December 16, 2015, the Company may redeem the notes at its option, in whole or in part, at any time, by paying the redemption prices described in “Description of the Notes—Redemption at the Option of the Company Beginning in 2015”, plus accrued and unpaid interest and additional amounts, if any, to the redemption date.

Any such redemption will be subject to either (i) there being at least U.S.$150 million in aggregate principal amount of notes (including any additional notes) outstanding after such redemption or (ii) the Company redeeming all the then-outstanding principal amount of the notes.

Tax redemption ...... We may redeem the notes, in whole but not in part, at 100% of their principal amount plus accrued interest and additional amounts, if any, upon the occurrence of specified events relating to Brazilian tax law. See “Description of the Notes—Redemption at the Option of the Company for Changes in Brazilian Withholding Tax”.

Purchase of the notes upon Change of Control Event ...... If a specified Change of Control occurs as described herein, unless SABESP has exercised its option to redeem the notes, SABESP will be required to offer to purchase the notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest and additional amounts, if any, to the purchase date. See “Description of the Notes—Purchase of Notes Upon Change of Control Event”.

7 Additional amounts ...... Payments of interest on the notes will be made after withholding and deduction for any Brazilian taxes as set forth under “Taxation — Brazilian taxation”. We will pay such additional amounts as will result in receipt by the holders of notes of such amounts as would have been received by them had no such withholding or deduction for Brazilian taxes been required, subject to certain exceptions set forth under “Description of Notes—Additional Amounts”.

Covenants ...... The indenture will contain covenants restricting our ability to:

● create liens;

● incur additional indebtedness;

● engage in sale-leaseback transactions;

● engage in certain business activities;

● enter into certain transactions with affiliates; and

● engage in a merger, sale or consolidation transaction.

However, these restrictions are subject to a number of important exceptions. See “Description of the Notes—Certain Covenants”.

Events of default ...... The indenture will set forth the events of default applicable to the notes, including an event of default triggered by acceleration of other indebtedness in an amount of US$50 million or more.

Use of proceeds ...... We will use the gross proceeds from the issuance of the notes to repay certain outstanding indebtedness.

Form and denomination; settlement ...... The notes will be issued in the form of global notes in fully registered form without interest coupons, as described under “Description of the Notes — Book-entry; delivery and form”. The global notes will be exchangeable or transferable, as the case may be, for definitive certificated notes in fully registered form without interest coupons only in limited circumstances. The notes will be issued in registered form in denominations of US$200,000 and integral multiples of US$1,000 in excess thereof. See “Description of the Notes — Book-Entry; Delivery and Form”.

The notes will be delivered in book-entry form through the facilities of DTC for the accounts of its participants, including Euroclear Bank, S.A./N.V., as operator of the Euroclear system, and Clearstream Banking, société anonyme, and will trade in DTC’s Same-Day Funds Settlement System.

Transfer restrictions ...... The notes have not been registered under the Securities Act and are subject to limitations on transfers, as described under “Notice to Investors”.

Listing of the notes...... Application has been made to admit the notes to listing on the Luxembourg Stock Exchange and to trade the notes on the Euro MTF

8 Market.

If the listing of the notes on the Luxembourg Stock Exchange would, in the future, require us to publish financial information either more regularly than we otherwise would be required to, or according to accounting principles which are materially different from the accounting principles which we would otherwise use to prepare our published financial information, we may seek an alternative admission to listing, trading and/or quotation for the notes by another listing authority, stock exchange and/or quotation system.

Governing law...... The indenture and the notes will be governed by, and construed in accordance with, the laws of the State of New York.

Trustee, registrar, paying agent and transfer agent ...... Deutsche Bank Trust Company Americas.

Principal paying agent...... Deutsche Bank Trust Company Americas.

Luxembourg paying agent, transfer agent and listing agent...... Deutsche Bank Luxembourg, S.A.

Risk Factors...... You should carefully consider all of the information contained in this offering memorandum prior to investing in the notes. In particular, we urge you to carefully consider the information set forth under “Risk Factors” in this offering memorandum.

9 Summary Financial and Operating Information

The tables below contain a summary of our financial and operating data as of and for each of the periods indicated. You should read the summary financial data in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this offering memorandum.

The summary consolidated financial information as of and for the years ended December 31, 2009, 2008 and 2007 has been derived from our audited annual consolidated financial statements as of and for the years ended December 31, 2009, 2008 and 2007, prepared in accordance with Brazilian GAAP, which appear elsewhere in this offering memorandum. The summary consolidated financial information as of September 30, 2010 and for the nine months ended September 30, 2009 and 2010 has been derived from our unaudited interim consolidated financial statements as of September 30, 2010 and for the nine months ended September 30, 2010 and 2009 prepared in accordance with Brazilian GAAP, which appear elsewhere in this offering memorandum. Results for interim periods are not necessarily indicative of results for the full year.

Our consolidated financial statements have been prepared in accordance with Brazilian GAAP, which differs in significant respects from IFRS. See “Annex A—Summary of Principal Differences Between Brazilian GAAP and IFRS” for a discussion of the principal differences between Brazilian GAAP and IFRS.

Brazilian GAAP

Consolidated Statement of Income Data

Year ended December 31, Nine months ended September 30, 2007 2008 2009 2009 2009 2010 2010 (in millions of R$) (in millions (in millions of R$) (in millions of US$)(1) of US$)(1) Net revenue from sales and services ...... 5,970.8 6,351.7 6,730.5 3,972.6 4,906.0 5,357.4 3,162.2 Cost of sales and services ...... (2,695.7) (2,831.8) (3,076.2) (1,815.7) (2,427.4) (2,327.2) (1,373.6) Gross profit...... 3,275.1 3,519.9 3,654.3 2,156.9 2,478.6 3,030.2 1,788.6 Selling expenses ...... (639.6) (718.9) (801.3) (473.0) (597.2) (630.7) (372.3) Administrative expenses...... (552.6) (578.6) (672.3) (396.8) (458.9) (399.8) (236.0) Other operating income (expenses), net...... (35.1) (1,053.0) (39.5) (23.3) 14.8 5.2 3.1 Foreign exchange gain (losses), net ...... 188.0 (438.9) 395.4 233.4 367.1 22.1 13.0 Financial expenses, net ...... (749.0) (268.7) (598.7) (353.4) (456.3) (376.7) (222.3) Income before income tax and social contribution...... 1,486.8 461.8 1,937.9 1,143.8 1,348.1 1,650.3 974.1 Income tax and social contribution ...... (431.5) (398.2) (564.0) (332.9) (431.5) (576.2) (340.1) Net income ...... 1,055.3 63.6 1,373.9 810.9 916.6 1,074.1 634.0

10 Consolidated Balance Sheet Data

As of December 31, As of September 30, 2007 2008 2009 2009 2010 2010 (in millions of R$) (in millions (in millions (in millions of US$)(1) of R$) of US$)(1)

Cash and cash equivalents ...... 465.0 625.7 771.0 455.1 1,367.2 807.0 Customer accounts receivable...... 1,486.7 1,456.2 1,446.2 853.6 1,392.2 821.7 Reimbursement for pension benefits paid...... 879.1 956.6 923.2 544.9 894.0 527.7 Short- and long-term receivables from shareholders, net(2) ...... 446.4 234.3 169.5 100.0 179.4 105.9 Property, plant and equipment, net ...... 14,051.4 14,350.7 15,443.2 9,115.3 8,906.9 5,257.3 Intangible assets, net ...... 516.5 1,391.3 1,545.3 912.1 9,074.1 5,356.0 Total assets ...... 18,659.9 20,113.9 21,565.2 12,728.8 23,539.7 13,894.3 Total short-term loans and financing ...... 742.1 1,448.9 1,010.5 596.4 1,163.6 686.8 Total long-term loans and financing ...... 4,943.1 5,416.2 5,549.5 3,275.6 6,496.3 3,834.4 Interest on shareholders’ equity payable ...... 680.3 275.0 365.4 215.7 — — Total liabilities ...... 8,879.4 10,566.0 11,037.6 6,514.9 11,938.0 7,046.4 Shareholders’ equity ...... 9,780.5 9,547.9 10,527.6 6,213.9 11,601.7 6,487.9

Other Financial Information

Nine months ended Year ended December 31, September 30, 2007 2008 2009 2009 2009 2010 2010 (in millions of R$) (in millions (in millions of R$) (in millions of US$)(1) of US$)(1) Cash provided by operating activities ...... 2,215.6 2,528.0 2,061.7 1,216.9 1,624.2 1,235.2 729.1 Cash used in investing activities ...... (881.7) (1,555.2) (1,953.3) (1,152.9) (1,358.1) (1,319.8) (779.0) Cash provided by (used in) financing activities... (1,197.1) (812.1) 36.9 21.8 (505.5) 680.8 401.8 Adjusted EBITDA(3) ...... 2,698.9 2,840.2 2,741.4 1,618.1 1,907.2 2,439.0 1,439.6 Capital expenditures ...... (881.7) (1,555.2) (1,982.5) (1,170.2) (1,360.4) (1,319.2) (778.7) Depreciation and amortization ...... 616.0 617.8 560.7 331.0 484.7 439.3 259.3

(1) Amounts in reais have been translated for convenience only to U.S. dollars at an exchange rate of R$1.6942 per US$1.00, which was the commercial selling rate for U.S. dollars in effect on September 30, 2010, as reported by the Central Bank. (2) Short-term and long-term receivables from shareholders, net represent amounts due from the State for water and sewage services. See Note 5 to our consolidated financial statements as of and for the years ended December 31, 2009 and 2008 and Note 5 to our consolidated financial statements as of September 30, 2010 and for the nine months ended September 30, 2010 and 2009, included elsewhere in this offering memorandum. (3) The inclusion of Adjusted EBITDA aims at presenting a measure of our economic operating performance. Our Adjusted EBITDA means net income before financial expenses, net, income tax and social contribution, depreciation and amortization and other operating income (expenses), net. Adjusted EBITDA is not a measure of financial performance recognized under Brazilian GAAP and should not be considered individually or as an alternative to net income, as a measure of our operating performance, or as an alternative to operating cash flows as a measure of liquidity. Our definition of Adjusted EBITDA and EBITDA may not be comparable with the definition of Adjusted EBITDA or EBITDA used by other companies. In our operations, we relate our Adjusted EBITDA to our operating cash flows. We do not include in the calculation of Adjusted EBITDA expenses with interest, taxes, depreciation and amortization, and, therefore, our Adjusted EBITDA works as a general indicator of economic performances and is not affected by debt restructurings, interest rate fluctuations, changes in tax burden or depreciation and amortization levels. Consequently, we believe that Adjusted EBITDA works as an adequate tool to regularly compare our operating performance. Additionally, Adjusted EBITDA is used in covenants related to some of our financial commitments. We believe that Adjusted EBITDA allows a better understanding not only of our financial performance but also of our capacity to satisfy our liabilities and to raise funds for our capital expenditures and working capital. Adjusted EBITDA, however, has limitations that prevent it from being used as a measure of our profitability because it does not take into consideration other costs resulting from our business or certain other costs, which could significantly affect our profits, such as financial expenses, taxes, depreciation, capital expenses and other related charges. The table below sets forth, for the periods indicated, the reconciliation between our net income and Adjusted EBITDA.

11 Year ended December 31, Nine months ended September 30, 2007 2008 2009 2009 2009 2010 2010 (in millions of R$, except (in millions of US$, (in millions of R$, (in millions of US$. ratios) except ratios)(a) except ratios) except ratios)(a) Net income...... 1,055.3 63.6 1,373.9 810.9 916.6 1,074.1 634.0 Financial expenses, net...... (749.0) (268.7) (598.7) (353.4) (456.3) (376.7) (222.3) Foreign exchange gain (losses), 188.0 (438.9) 395.4 233.4 367.1 22.1 13.0 net...... Income tax and social (431.5) (398.2) (564.0) (332.9) (431.5) (576.2) (340.1) contribution ...... Depreciation and amortization...... (616.0) (617.8) (560.7) (331.0) (484.7) (439.3) (259.3) Other operating income (35.1) (1,053.0) (39.5) (23.3) 14.8 5.2 3.1 (expenses), net(b) ...... Adjusted EBITDA...... 2,698.9 2,840.2 2,741.4 1,618.1 1,907.2 2,439.0 1,439.6 Adjusted EBITDA margin(c)...... 45.2% 44.7% 40.7% 40.7% 38.9% 45.5% 45.5% Net debt to Adjusted EBITDA (d)...... 1.93x 2.20x 2.11x 2.11x 2.15x (e) 1.92x (e) 1.92x (e)

(a) Amounts in reais have been translated for convenience only to U.S. dollars at an exchange rate of R$1.6942 per US$1.00, which was the commercial selling rate for U.S. dollars in effect on September 30, 2010, as reported by the Central Bank. (b) This caption is mainly comprised of gain or loss on sales of fixed assets, scraps, indemnifications, expense reimbursement, write-off of fixed assets and provisions relating to the actuarial obligation of State Law No. 4819/58. Under Brazilian GAAP, this caption was called “Non-operating results” before Law No. 11,638/07 was amended. See “Presentation of Financial Information.” As from the adoption of such amendment, we have taken “Other-operating income (expenses), net” into consideration in connection with the calculation of our Adjusted EBITDA. (c) Adjusted EBITDA as a percentage of net revenue from sales and services. (d) Ratio of net debt to Adjusted EBITDA. (e) Calculated based on Adjusted EBITDA for the twelve months ended September 30, 2009 and 2010.

Operating Data

As of or for the nine As of or for the year ended months ended September December 31, 30, 2007 2008 2009 2009 2010

Number of water connections (in thousands) 6,767 6,945 7,118 7,086 7,253 Number of sewage connections (in thousands)...... 5,167 5,336 5,520 5,478 5,667 Percentage of population in our area with water connections (in percentages) ...... 99 99 99 99 99 Percentage of population in our area with sewer connections (in percentages) ...... 79 79 80 80 81 Volume of water billed during period (in millions of cubic meters) ...... 1,847 1,880 1,919 1,426 1,484 Water loss percentage during period (average)(in percentages)(2) ...... 29.5 27.9 26.0 26.5 26.0 Water loss per connection (average)(3) ...... 467 436 402 406 401 Number of employees...... 16,850 16,649 15,103 16,101 15,165

12 RISK FACTORS

Purchasing notes involves a high degree of risk. Prospective purchasers of notes should carefully consider the risks described below, as well as the other information in this offering memorandum, before deciding to purchase any notes.

Risks Relating to Brazil

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement, as well as Brazilian political and economic conditions, could adversely affect us and the market price of the notes.

The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, increases in interest rates, changes in tax policies, price and tariff controls, currency devaluations, capital controls and limits on imports. Our business, financial condition and results of operations, as well as the market price of the notes, may be adversely affected by changes in public policy at federal, state and municipal levels with respect to public tariffs and exchange controls, as well as other factors, such as:

 the regulatory environment related to our business operations and concession agreements;

 interest rates;

 exchange controls and restrictions, such as those which were briefly imposed in 1989 and 1990;

 currency fluctuations;

 inflation;

 liquidity of the Brazilian capital and lending markets;

 tax and regulatory policies; and

 other political, social and economic developments in or affecting Brazil.

In addition, inflation, currency devaluation, social instability and other political, economic or diplomatic developments, as well as the federal government’s response to such developments, could adversely affect our business, financial condition and results of operations.

Uncertainty over whether the Brazilian government will implement changes in policy or regulation affecting these or other factors in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and in the securities issued abroad by Brazilian issuers. The president of Brazil has considerable power to determine governmental policies and actions that relate to the Brazilian economy and that could consequently affect our financial condition and results of operations. The term of Brazil’s current President, Luiz Inácio Lula da Silva, expires in January 2011, and his successor, Dilma Rousseff, was elected in elections held in October 2010. Uncertainty regarding the policies that may be implemented by president-elect Rousseff and by the Brazilian federal or state governments following her accession, could have a material adverse effect on us and on the market price of the notes.

Inflation, and the Brazilian government’s measures to combat inflation, may contribute to economic uncertainty in Brazil, adversely affecting us and the market price of the notes.

Brazil has experienced extremely high rates of inflation in the past. Inflation and the Brazilian government’s measures to fight inflation have had significant negative effects on the Brazilian economy,

13 contributing to economic uncertainty and heightened volatility in the Brazilian securities markets. The Brazilian government’s measures to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and reducing economic growth. The Special Clearing and Settlement System (Sistema Especial de Liquidação e Custódia) (“SELIC”), the official overnight interest rate in Brazil, at the end of 2007, 2008 and 2009 and the nine months ended September 30, 2010 was 11.18%, 13.66%, 8.65% and 10.66%, respectively, in line with the target rate set by the Brazilian Committee on Monetary Policy (Comitê de Política Monetária) (“COPOM”).

The annual rate of inflation, as measured by the General Market Price Index (Índice Geral de Preços— Mercado) (“IGP-M ”) fell from 9.95% in 2000 to 3.83% in 2006, increased to 7.75% in 2007 and further increased to 9.81% in 2008. In 2009, there was deflation of 1.71%, according to the IGP-M, and the rate of inflation for the nine months ended September 30, 2010, was 7.89%, according to the IGP-M. Brazilian governmental actions, including interest rate decreases, intervention in the foreign exchange market and actions to adjust or fix the value of the real, may trigger increases in inflation. If Brazil again experiences high inflation, our costs and expenses may rise, we may be unable to increase out tariffs to counter the effects of inflation, and our overall financial performance may be adversely affected. In addition, a substantial increase in inflation may weaken investors’ confidence in Brazil, causing a decline in the market price of the notes.

Additionally, in the event of an increase in inflation, the Brazilian government may choose to raise official interest rates. Increases in interest rates would not only affect our cost of funding, but could also have a material adverse effect on us and may also adversely affect the market price of the notes.

Exchange rate instability may adversely affect us and the market price of the notes.

The Brazilian currency has experienced frequent and substantial devaluations in relation to the U.S. dollar and other foreign currencies during the last decades. Throughout this period, the Brazilian government has implemented various economic plans and utilized a number of exchange rate policies, including sudden devaluations, periodic mini-devaluations during which the frequency of adjustments ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets. From time to time, there have been significant fluctuations in the exchange rate between the Brazilian real and the U.S. dollar and other currencies. For example, the real depreciated against the U.S. dollar by 9.3% in 2000, 18.6% in 2001 and 52.25% in 2002. The real appreciated 11.81%, 8.66% and 17.15% against the U.S. dollar in 2005, 2006 and 2007, respectively. In 2008, the real depreciated by 31.9% and in 2009, appreciated by 25.5% against the U.S. dollar. There can be no assurance that the real will not further depreciate against the U.S. dollar. As of December 3, 2010, the commercial selling rate as reported by the Central Bank was R$1.6917 per US$1.00.

In the event of a significant devaluation of the real in relation to the U.S. dollar or other currencies, our ability to meet our foreign currency-denominated obligations could be adversely affected, particularly because our tariff revenue and other sources of income are based solely in reais. In addition, because we have foreign currency- denominated indebtedness, any significant devaluation of the real will increase our financial expenses as a result of foreign exchange losses that we must record. We had total foreign currency-denominated indebtedness of R$1,715.7 million as of September 30, 2010, and we anticipate that we may incur substantial amounts of foreign currency-denominated indebtedness in the future (including pursuant to the offering of the notes). In 2008, our results of operations were negatively affected by the 31.9% depreciation of the real against the U.S. dollar, which amounted to R$438.9 million. In 2009, our results of operations were positively affected by the 25.5% appreciation of the real against the U.S. dollar, which amounted to R$395.4 million. We do not currently have any hedging instruments in place to protect us against a devaluation of the real in relation to any foreign currency. A devaluation of the real may adversely affect us and the market price of the notes.

Developments and the perception of risk in other countries, especially in the United States and in emerging market countries, may adversely affect the market price of Brazilian securities, including the notes.

The market value of securities of Brazilian companies is affected to varying degrees by economic and market conditions in other countries, including the United States and other Latin American and emerging market countries. Although economic conditions in these countries may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market value

14 of securities of Brazilian issuers. Crises in other emerging market countries or economic policies of other countries may diminish investor interest in securities of Brazilian issuers, including ours. This could adversely affect the market price of the notes, and could also make it more difficult for us to access the capital markets and finance our operations in the future, on acceptable terms or at all.

The global financial crisis has had significant consequences, including in Brazil, such as stock and credit market volatility, unavailability of credit, higher interest rates, a general slowdown of the world economy, volatile exchange rates, and inflationary pressure, among others, which have and may continue to, directly or indirectly, materially and adversely affect our operating results, financial position and the price of securities issued by Brazilian companies, including us.

Changes in Brazilian GAAP in effect as from January 1, 2010 relating to the process of convergence to IFRS may adversely impact our results of operations and the calculation of our financial covenants.

Our consolidated financial statements included in this offering memorandum have been prepared in accordance with Brazilian GAAP, which differs in certain significant respects from IFRS. Our consolidated financial statements prepared in accordance with Brazilian GAAP contained in this offering memorandum would differ from those prepared under IFRS, including the consolidated financial statements prepared under IFRS in our annual report on Form 20-F filed with the SEC.

Brazilian Corporate Law was amended by Law No. 11,638/07 in order to facilitate the convergence of Brazilian GAAP with IFRS, and since then, the CPC has issued several new accounting standards that progressively adapted Brazilian GAAP to IFRS. IFRS will become mandatory for all Brazilian publicly held companies beginning in the year ending December 31, 2010, as a result of which our consolidated financial statements for such year and future years may differ significantly from the consolidated financial statements included in this offering memorandum.

The new Brazilian accounting rules became effective for year-end financial statements relating to any fiscal year starting on or after January 1, 2008 and have been applied to our consolidated financial statements as of and for the years ended December 31, 2009, 2008 and 2007. For further information on the impact on our consolidated financial statements and our critical accounting policies of the new accounting rules introduced by Law No. 11,638/07, see Note 2 to our consolidated financial statements as of and for the years ended December 31, 2008 and 2007.

The changes in Brazilian GAAP could have a significant effect on our reported results of operations, including effects on our net income and the measures that our creditors use to monitor our performance under our debt instruments. Any reduction in our net income, as measured under the revisions introduced to Brazilian GAAP under these laws and regulations would have an adverse effect on our net income, and potentially, our ability to distribute dividends on our preferred and common shares. In addition, an adverse effect under the ratios contained in the covenants in our debt instruments, as a result of the change in the way that our operating results are measured under the revisions introduced to Brazilian GAAP, could adversely affect our ability to comply with these covenants. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Liquidity and Capital Resources—Capital Sources—Financial Covenants” for a discussion about the effect of the accounting changes on our covenants.

Risks Relating to Our Control by the State of São Paulo

We are controlled by the State of São Paulo, whose interests may differ from ours or from minority shareholders’ interests, and which could have a material adverse effect on us.

The State of São Paulo, through its ownership of our common shares, has the ability to determine our operating policies and strategy, to control the election of a majority of the members of our board of directors and to appoint our senior management. As of September 30, 2010, the State owned 50.3% of our outstanding common shares.

15 The State has directed from time to time in the past, and may direct in the future, through its control of our board of directors and through the enactment of State decrees, that we engage in certain business activities and make certain expenditures that promote political, economic or social goals but that do not necessarily also enhance our business and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting our Results of Operations”.

Newly elected governors of the State typically make significant changes in our board of directors and senior management and, historically, the chairman of our board of directors has been the Secretary of State for the State Secretariat for Sanitation and Energy (Secretaria de Saneamento e Energia do Estado de São Paulo). As of the date of this offering memorandum, we do not know whether any such changes will result from the elections held in October 2010.

We have a substantial amount of accounts receivable owed to us by the State and some State entities, and we cannot assure you as to when or whether the State will pay us.

Historically, the State and some State entities have had substantial overdue accounts payable to us relating to (i) the provision of water and sewage services and (ii) State-mandated special retirement and pension payments that we make to some of our former employees for which the State is required to reimburse us. As of September 30, 2010, the amounts owed to us by the State for the provision of water and sewage services totaled R$179.4 million. With respect to payment of pensions on behalf of the State, as of September 30, 2010, we believe that the State owed to us R$1,404.3 million, in respect of which we had recorded provisions in the amount of R$510.3 million as of that date due to the current stage of the negotiations with the State and the uncertainty regarding the recovery of the amount. In addition, as of September 30, 2010, we had recorded a provision for actuarial liability in the amount of R$506.7 million in respect of future supplemental pension payments the State does not believe it is responsible for paying. Amounts owed to us by the State for water and sewage services and reimbursements for pensions paid may increase in the future.

We have entered into agreements with the State to settle these overdue amounts payable to us. For a detailed discussion of these agreements, see “Principal Shareholders and Related Party Transactions” and Note 5 to our audited annual consolidated financial statements as of and for the years ended December 31, 2009 and 2008. Pursuant to these agreements, the amounts due with respect to water and sewage services could be settled with respect to amounts owed to us through December 2007 through the application of dividends payable by us to the State. In December 2007, the State agreed to pay us the outstanding balance in the amount of R$133.7 million (as of November 30, 2007), in 60 consecutive monthly installments, beginning on January 2, 2008, and the amount of R$236.1 million relating to part of the accounts overdue and unpaid from March 2004 through October 2007 regarding the provision of water supply and sewage collection services. We agreed to pay the State the outstanding balance of dividends, in the form of interest on shareholders’ equity, due from March 2004 through December 2006, in the amount of R$400.8 million, in the period from January through March 2008.

In March 2008, we entered into a commitment agreement with the State for the settlement of outstanding debts related to the reimbursement of pension benefits. Pursuant to the commitment agreement, the amounts due to us with respect to payments of pensions on behalf of the State may be partially settled through the transfer to us of certain reservoirs in the Alto Tietê System that we use and are owned by the State. In November 2008, we entered into an agreement with the State relating to payments of pension benefits made by us on its behalf. The State acknowledged that it owed us the outstanding balance of R$915.3 million as of September 30, 2008, relating to payments of pension benefits made by us on its behalf. We provisionally accepted the reservoirs in the Alto Tietê System as partial payment (R$696.3 million), subject to the transfer of the property rights of these reservoirs to us. Since November 2008, the State has been paying the remaining balance in the amount of R$219.0 million in 114 successive monthly installments. We are unable to predict whether and when these reservoirs will be transferred to us because the Public Prosecution Office of the State of São Paulo (Ministério Público do Estado de São Paulo) filed a civil public action alleging that a transfer to us of ownership of the Alto Tietê System reservoirs is illegal. See “Business—Legal Proceedings—Other Legal Proceedings”.

In addition to the R$915.3 million that the State acknowledges it owes us pursuant to the November 2008 agreement, we are negotiating with the State in respect of further amounts that the State does not recognize it owes

16 us. While we continue to negotiate directly with the State, we are not able to assure you that we will be successful in these negotiations.

We cannot assure you when or if the State will pay the total overdue amounts owed to us. Due to the State’s history of not making timely payments to us in respect of services and of not reimbursing us in a timely manner for the payments of pensions on behalf of the State, we cannot assure you that the amount of accounts receivable owed to us by the State and some State entities will not significantly increase in the future.

We may be required to acquire reservoirs that we use and that are owned by a State-controlled company, or we may be required to pay substantial charges to the owner with respect to our use of these reservoirs.

In connection with the provision of water services, we use the Billings and Guarapiranga reservoirs that are owned by a State-controlled company, the Water and Energy Metropolitan Company (Empresa Metropolitana de Águas e Energia S.A.) (“EMAE”). We are entitled to use these reservoirs based on a grant issued by the State Department of Water and Energy (Departamento de Águas e Energia Elétrica do Estado de São Paulo) (“DAEE”). The State, through its control of our board of directors, could require us to acquire the Billings and Guarapiranga reservoirs. As a result of these acquisitions, our cash position and overall financial condition could be adversely affected. In addition, since we are not currently charged for the use of these reservoirs, we are uncertain as to whether we will continue to be able to use the reservoirs without paying charges, or what the likely fee scale would be, if imposed. We may also be required to pay additional maintenance and operational costs for our use of the Billings and Guarapiranga reservoirs. If we were required to pay substantial charges to the owner or additional maintenance or operational costs for our use of these reservoirs, we could be materially and adversely affected.

Risks Relating to Our Business

We cannot anticipate the effects that further developments of the Basic Sanitation Law and its interpretation will have on the basic sanitation industry in Brazil and on us.

Law No. 11,445, or the Basic Sanitation Law, was enacted on January 5, 2007. While it has been in effect for approximately four years, it is still in its early stages of implementation in Brazil, and we continue to be unable to anticipate all of the effects that it might have on our operations and business. There are still several uncertainties related to the interpretation of the Basic Sanitation Law. On June 21, 2010, the federal government enacted Federal Decree 7,217, regulating the Basic Sanitation Law. Among other things, Federal Decree 7,217 provided that (a) public hearings regarding the bid announcements and technical and economic viability studies are requirements for the validity of public-public partnership contracts (contratos de programa); (b) the rights and obligations, including penalties, of customers and service providers shall be ruled by the owner of the public service, not by the regulatory agency; (c) financial feasibility may be demonstrated by means of the requirement for new investments, other than the proceeds arising from the rendering of services; and (d) there must be a contract controlling the services rendered (contrato de articulação), where the public service is rendered by different services providers. We cannot currently anticipate the effects that the decree will have on our business and operations, if any.

In addition, the ARSESP is the State agency responsible for regulating the basic sanitation industry, including tariff regulation. The ARSESP acts as tariff regulator both in municipalities where the State provides basic sanitation services, and in those municipalities that have delegated their regulatory powers to the State through cooperation agreements. The ARSESP presently regulates our tariff structure and adjustments pursuant to the same tariff structure and adjustment formula that we otherwise apply. Pursuant to a cooperation agreement among the State and some municipalities, the ARSESP also regulates our tariffs in municipalities that selected ARSESP to regulate our tariffs.

Since 2008, the ARSESP has been developing new concepts in the tariff structure and adjustment formula. The ARSESP expects to release a revised tariff structure and adjustment formula that includes such new concepts in 2011. We cannot anticipate the additional changes that the ARSESP will implement on our tariff structure and adjustment formula nor the effects that these changes will have on us. If the changes are unfavorable to us, it could have a material adverse effect on our business, financial condition and results of operations. Moreover, the ARSESP also enacted certain rules establishing (i) the general conditions for the services we render, (ii) the

17 communication process for any failure in our services and (iii) the penalties for deficiencies in basic sanitation services. We are currently evaluating the enforceability and legality of some of these rules. Compliance with the rules enacted by the ARSESP may adversely affect us. In April 2010, the ARSESP submitted for public comments a new methodology for the determination of the compensation of the assets used in the basic sanitation services we render, in view of a future tariff reform. Although the ARSESP has indicated that it will implement the new methodology by September 2011, we cannot assure when the new rules will be enacted.

Furthermore, under the Basic Sanitation Law, we are required to enter into contractual arrangements, before December 31, 2010, with every municipality with which we do not have a formal agreement or with which our agreements have already expired, as is the case of certain municipalities located in the metropolitan regions where we are authorized to operate in accordance with local legislation. With respect to (a) the municipalities located in the metropolitan regions, we may not be in a position to comply with this requirement depending on the final decision of the Brazilian Supreme Court regarding whether the State or municipalities have the right to enter into contractual arrangements for the provision of basic sanitation services in the metropolitan regions, and (b) the municipalities located outside the metropolitan regions, the execution of new agreements will depend on certain acts that are beyond our control, such as the compliance by the municipalities with certain legal procedures. However, the Basic Sanitation Law does not provide for any penalty or fine in case of non-compliance with this legal requirement. If any penalty or fine is duly imposed on us due to our non-compliance with this legal requirement, it could have a material adverse effect on our business, financial condition and results of operations.

The terms of our new agreement to provide water and sewage services in the city of São Paulo could have a material adverse effect on us.

Our provision of water and sewage services in the city of São Paulo accounted for 55.6% of our gross revenues in the year ended December 31, 2009 and 54.2% of our gross revenues in the nine months ended September 30, 2010.

On June 23, 2010, the State and the city of São Paulo entered into a convention (convênio) with the intermediation and consent of SABESP and of the ARSESP pursuant to which they agreed to jointly manage the planning of and investment in the basic sanitation system of the city of São Paulo, among other things. This agreement established that the State and the city of São Paulo would enter into an agreement with us, granting us exclusive rights with respect to the provision of water and sewage services in the city of São Paulo. In addition, the agreement established the role of ARSESP in regulating and overseeing our activities and established a management committee (Comitê Gestor) that will be responsible for planning the water and sewage services and for reviewing our investment plans. The management committee will be composed of six members appointed for renewable two year terms. The State and the city of São Paulo will have the right to appoint three members each. We are permitted to participate in the meetings of the management committee; however, we are not afforded any voting rights.

Also, on June 23, 2010, we entered into a formal agreement with the State and the city of São Paulo to regulate the provision of these services. This agreement requires us, among other things, (i) to invest at least 13.0% of the gross revenues we obtain from the agreement, net of the contribution for social security financing (Contribuição para Financiamento da Seguridade Social) (“Cofins”) and the contribution for the program for government Employee Fund (Programa de Formação do Patrimônio do Servidor Público) (“Pasep”) in the improvement of water and sewage infrastructure in the city of São Paulo; and (ii) to contribute 7.5% of the gross revenues we obtain from the agreement, net of Cofins and Pasep taxes, to the Municipal Fund for Environmental Sanitation and Infrastructure (Fundo Municipal de Saneamento Ambiental e Infraestrutura) (“São Paulo Municipal Sanitation Fund”) established by Municipal Law No. 14,934/2009. In addition, the agreement provides that the ARSESP, the State agency responsible for regulating the sanitation industry, will ensure that the tariffs charged (a) will adequately compensate us for the services we provide and (b) can be adjusted to restore the original balance between each party’s obligation and economic gain (equilíbrio econômico-financeiro).

Because we were not previously required to make the mandatory allocations described in items (i) and (ii) above, they were not taken into account in calculating our existing tariff and its adjustment formula. Despite the contractual provisions and the ARSESP’s role in setting and adjusting adequate tariffs, we cannot guarantee that the tariffs we will be allowed to charge for the provision of water and sewage services in the city of São Paulo will

18 continue to adequately compensate us. If tariffs are set or adjusted below a level that adequately compensates us, it could impair our ability to meet our obligations under the notes.

The decision of the Brazilian Supreme Court regarding whether State or municipal governments have the right to execute concession and program agreements could have a material adverse effect on us.

The agreement with the State and the city of São Paulo regulates the provision of water and sewage services in the city of São Paulo. It remains uncertain whether state or municipal governments have the authority to plan and regulate basic sanitation services rendered to metropolitan regions, as well as the right to execute concession and program agreements. This issue is under discussion before the Brazilian Supreme Court in a suit initiated by third parties. If the Brazilian Supreme Court grants this authority to municipal governments, under certain circumstances, we may be required to cease our operations in certain areas of the São Paulo metropolitan region in the event that certain municipalities opt to use another water and sewage service provider.

We cannot anticipate the effects of the Brazilian Supreme Court decision on the provision of our services in the city of São Paulo and in these other municipalities located in the São Paulo metropolitan region, either of which may affect our existing agreements to provide water and sewage services in these municipalities in a manner we cannot anticipate and could have a material adverse effect on our business, financial condition and results of operations.

We have not entered into formal agreements for the provision of water and sewage services with certain of the municipalities we serve, including the cities comprising the São Paulo metropolitan region except in the municipality of São Paulo, and therefore may not be able to enforce our rights to continue to provide services in these municipalities.

We are currently renegotiating 92 concession agreements with municipalities located outside the São Paulo metropolitan region that have expired over the last five years. Our ability to renew concessions during 2010 was adversely affected by the State elections which took place in October 2010. In addition, because of the uncertainty over whether the State or the municipalities have the right to enter into contractual arrangements for the provision of sanitation services in the metropolitan regions, until the signing of the agreement with the city and State of Sao Paulo in June 2010 there was no precedent for a joint management contractual arrangement between the State, the municipalities and SABESP. Moreover, as of the date of this offering memorandum, we have not entered into formal agreements for the provision of water and sewage services with 22 municipalities in the State, including the municipality of Santos, which is located in the coastal region and has a population of approximately 430,000, where we operate under a deed of authorization (escritura pública de autorização). Together, these 114 municipalities accounted for 19.3% and 11.8% of our total revenues for the year ended December 31, 2009 and the nine months ended September 30, 2010, respectively, and 28.9% and 30.7% of our total assets as of December 31, 2009 and as of September 30, 2010, respectively.

Because we do not hold concessions or contractual rights to provide services in some of these municipalities, we may not be able to effectively enforce our right to continue to provide services or may face difficulties in being timely paid for the services that we provide. In the future, our rights in respect of these other municipalities could be modified or adversely affected by Brazilian federal, state or municipal governmental actions, judicial decisions or other factors. For further information, see “Business—Government Regulation—The Basic Sanitation Law” and “Business—Government Regulation—Public Consortia Law and Cooperation Agreement for Joint Management”.

The Basic Sanitation Law sets December 31, 2010 as the deadline for water and sewage service companies, such as us, to regularize the provision of water and sewage services to municipalities, in those cases where there is no formal agreement to provide services to municipalities in effect. The Basic Sanitation Law did not define any penalty for the non-compliance with the deadline by the municipalities or for the water and sewage service companies in case this deadline is not observed. Consequently, we cannot anticipate if we are going to be subject to any penalty due to the lack of a formal agreement with some municipalities or if any eventual penalty will have a material adverse effect on us. We cannot anticipate the terms and conditions of these agreements and their effect on the provision of our services in these municipalities. See “—Risks Relating to Our Business —We cannot anticipate

19 the effects that further developments of the Basic Sanitation Law and its interpretation will have on the basic sanitation industry in Brazil and on us”.

We cannot assure you when or whether there will be changes to the conditions under which we currently provide water and sewage services to the municipalities with which we do not have formal concession agreements or whether we will be able to continue to provide water and sewage services in any municipalities where we are unable to renew or enter into a concession agreement.

We are exposed to risks associated with the provision of water and sewage services.

Our industry is specifically affected by the following risks associated with the provision of water and sewage services:

 we may become subject to substantial water-related and sewage-related charges imposed by governmental water agencies of the State and of the federal government related to the abstraction of water from, or dumping of sewage into, water resources controlled by these agencies, which we may not be able to pass on to our customers. See “Business—Government Regulation—Water Usage”;

 in some cases, we are required to continue providing services to certain municipalities to which we provide water on a wholesale basis that have overdue amounts owed to us and are not paying us on a regular basis, and we cannot assure you of when or whether these municipalities will pay us in a timely manner. See “Business—Billing Procedures”;

 the degradation of watershed areas may affect the quantity and quality of water available to meet our customers’ demand. See “Business—History and Development of the Company—Capital Expenditure Program”;

 our tariffs may not increase in line with increases in inflation and operating expenses, including taxes, or increase in a timely manner, which may hinder us from passing on to our customers increases in our cost structure. See “Risk Factors—Risks Relating to Our Business—The terms of our new agreement to provide water and sewage services in the city of São Paulo could have a material adverse effect on us”. These constraints may also have an adverse effect on our ability to fund our capital expenditure program and financing activities, and to meet our debt service requirements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Effects of Tariff Increases”;

 we are exposed to the risk of future droughts that may adversely affect our water supply systems, resulting in a decrease in the volume of water distributed and billed as well as in the revenue derived from water supply distribution services. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Effects of Drought”; and

 we are dependent upon energy to conduct our operations and eventual shortages or rationing of energy may prevent us from providing water and sewage services and may also cause material damage to our water and sewage systems when we resume operations. Also, we may not be able to pass on to our customers significant increases in energy tariffs.

The occurrence of any of the above may have a material adverse effect on us.

We may face difficulties in continuing to provide water and sewage services in the municipalities we serve, and we cannot assure you that these municipalities will continue to require our provision of services under the same terms.

At September 30, 2010, we were a provider of water and sewage services to 364 municipalities. Between January 1, 2007 and September 30, 2010, we entered into 30-year agreements with 198 of these municipalities

20 (including our services agreement with the city of São Paulo), of which 14 were entered into in 2009 and 24 were entered into in the nine months ended September 30, 2010. These 198 municipalities accounted for 65.0% and 64.2% of our total revenues for the year ended December 31, 2009 and the nine months ended September 30, 2010, respectively, and 55.2% and 54.0% of our total assets as of December 31, 2009 and September 30, 2010. As of September 30, 2010, 92 of our concession agreements had expired and were under renegotiation. These 92 municipalities accounted for 12.1% and 4.1% of our total revenues for the year ended December 31, 2009 and the nine months ended September 30, 2010, respectively, and 12.6% and 13.1% of our total assets as of December 31, 2009 and September 30, 2010, respectively. From October 1, 2010 through 2030, 51 concession agreements will expire. These 51 concession agreements accounted for 8.1% and 8.1% of our total revenues for the year ended December 31, 2009 and the nine months ended September 30, 2010, respectively, and 5.5% and 5.6% of our total assets as of December 31, 2009 and September 30, 2010, respectively. Of these 51 agreements, 21 will expire prior to December 2020, when the notes will mature. These 21 concession agreements accounted for 3.3% and 3.3% of our total revenues for the year ended December 31, 2009 and the nine months ended September 30, 2010, respectively, and 3.0% and 3.2% of our total assets as of December 31, 2009 and September 30, 2010, respectively. The remaining agreements have indefinite terms and accounted for 7.6% and 16.0% of our total revenues for the year ended December 31, 2009 and the nine months ended September 30, 2010, respectively, and 10.5% and 9.6% of our total assets as of December 31, 2009 and September 30, 2010, respectively.

In addition, with the execution of the formal agreement with the State and city of São Paulo to regulate the provision of water and sewage services in the city of São Paulo on June 23, 2010, 22 municipalities remain without a formal agreement. These remaining municipalities accounted for 7.2% and 7.7% of our total revenues for the year ended December 31, 2009 and the nine months ended September 30, 2010, respectively and 16.3% and 17.6% of our assets as of December 31, 2009 and September 30, 2010, respectively.

We cannot assure you that these municipalities will continue to require our services and enter into new concession agreements or program agreements with us. These municipalities may choose to assume the direct provision of water and sewage services or promote a public bidding process to select another water and sewage service provider. Depending on the eligibility requirements to participate in the public bidding processes, we may not qualify to participate in some or all of these public bidding processes. If we participate in these public bidding processes, we cannot assure you that we will win the bid.

In the event that we are successful in renegotiating our concession agreements or entering into program agreements with the municipalities whose concession agreements expired or will expire, we cannot assure you that the new concession or program agreements will have the same terms under which we currently provide services to these municipalities. We cannot make any such assumption because the Basic Sanitation Law prevents us from planning, regulating and monitoring our services, and it requires more stringent control by the municipalities or by the ARSESP.

In the event that certain municipalities assume the direct provision of water and sewage services or promote a public bidding process to select another water and sewage service provider, or the new terms or conditions of the concession or program agreements are less favorable to us, we may be materially and adversely affected. See “Business—Our Operations” and “Business—Government Regulation— Public Consortia Law and Cooperation Agreement for Joint Management”.

Municipalities may, under certain circumstances, terminate our concessions before their expiration and the indemnification may be inadequate to recover the full value of our investments.

The concessions we hold are subject to early termination provisions, which entitle municipalities to terminate our concessions prior to their expiration date under certain circumstances. Municipalities may terminate our concessions if we fail to comply with our obligations under the relevant concession agreement or applicable law, or if the municipality determines, through an expropriation proceeding, that terminating our concession prior to its expiration date is in the public interest. If any municipality terminates our concession before the expiration date, we are entitled to be indemnified for the unamortized portion of our investments, but the indemnification may not be sufficient for us to recover the full value of our investments. Further, under the terms of the Constitution of the State of São Paulo, municipalities may pay the indemnification over a term of 25 years. However, the Brazilian Supreme

21 Court stayed the application of this provision of the Constitution of the State of São Paulo in 1997, and the decision remains valid until final judgment.

In 1997, the municipality of Santos enacted a law expropriating our water and sewage systems in Santos. There are pending legal proceedings concerning the expropriation carried out by this municipality. We continue to provide water and sewage services to the city of Santos.

In 1995, the municipality of Diadema terminated the concession agreement that had been entered into with us prior to the expiration of the concession agreement. As a result, we filed a lawsuit against the municipality of Diadema, which we eventually settled in 1996. The municipality of Diadema did not comply with this settlement. As a result, in December 2008, we entered into a memorandum of understanding with the State of São Paulo, the municipality of Diadema and State Secretariat for Sanitation and Energy (Secretaria de Saneamento e Energia do Estado de São Paulo). This memorandum establishes our agreement to conclude negotiations and settle all outstanding amounts. In addition, it indicates our intent to develop a share infrastructure for the provision of water and sewage services. This memorandum of understanding stayed the collection proceedings we had filed against the municipality of Diadema. We continue to supply water on a wholesale basis to the city of Diadema.

For further information on these lawsuits, see “Business—Legal Proceedings”.

We cannot assure you that other municipalities will not seek to terminate their concession agreements before the contractual expiration date. The early termination of concession agreements by municipalities, our inability to receive adequate indemnification for the investments we made, or the payment of indemnification due to us over a long period, may have a material adverse effect on us.

The Basic Sanitation Law has established provisions governing the indemnification of water and sewage service providers in case of early termination of concession agreements by a municipality and reduced the term over which indemnification must be paid to four years. These provisions are also applicable to concession agreements entered into prior to the enactment of the Basic Sanitation Law, as long as these concession agreements do not have a contractual indemnification provision in case of early termination or we have not otherwise entered into on agreement with the municipality with regard to such indemnification. Nevertheless, we cannot anticipate the effects of the Basic Sanitation Law on the amount of, and enforceability of the right to, indemnification and how Brazilian courts will enforce the provisions of the Basic Sanitation Law.

Any failure to obtain new financing may adversely affect our ability to continue our capital expenditure program.

Our capital expenditure program will require substantial liquidity and capital resources of approximately R$8.6 billion in the period from 2009 through 2013. We recorded R$1.8 billion of capital expenditure in 2009 in connection with our capital expenditure program.

We have funded in the past, and we plan to continue to fund these expenditures with, funds generated by operations and domestic and foreign currency borrowings on acceptable terms. A significant portion of our financing needs have been funded by lenders controlled by the federal government. We also benefit from long-term financing from domestic and international multilateral agencies and development banks at attractive interest rates. Changes in the policies of the federal government regarding the financing of water and sewage services, or our failure to continue to benefit from long-term financing from domestic and international multilateral agencies and development banks at attractive interest rates may impair our ability to meet our obligations or finance our capital expenditure program, which could have a material adverse effect on us.

As a general rule, financial institutions and other institutions authorized to provide credit by the Central Bank may only provide loans to public sector entities, such as us, up to a certain percentage of the entity’s shareholders’ equity. Because of these limitations on our ability to obtain credit from domestic financial institutions, our options for raising funds, other than the cash generated by our operations, consist mainly of borrowing from governmental agencies, national and international financial institutions or multilateral agencies and

22 issuing debt securities in both the domestic and international capital markets. These legal limitations could adversely affect our ability to continue our capital expenditure program.

We are subject to financial covenants limiting our ability to incur additional indebtedness, which could have a material adverse effect on us.

We are subject to financial covenants limiting our ability to incur additional indebtedness, whether denominated in reais or foreign currency.

With respect to our indebtedness denominated in U.S. dollars or in baskets of foreign currencies, we are subject to financial covenants, including but not limited to those set forth in our loan agreements entered into with the Inter-American Development Bank (“IADB”). Each of these agreements contains, among other provisions, limitations on our ability to incur debt. The indenture relating to our 7.5% notes due 2016 is the most stringent of these debt agreements. This indenture prohibits, subject to some exceptions, the incurrence of additional debt in the event that (i) the ratio of Adjusted Total Debt to Adjusted EBITDA (as defined in the related indenture) is greater than 3.65x or (ii) the Debt Service Coverage Ratio (as defined in the indenture) is less than 2.35x.

With respect to our outstanding domestic indebtedness, we have entered into a financing agreement with the federal government and Banco do Brasil S.A. and also into several credit agreements with Caixa Econômica Federal, that contain financial covenants. Under our credit agreement with the BNDES, we are required to keep (i) an EBITDA/net operational income ratio equal to or higher than 38%; (ii) an asset/short-term liability (excluding the short-term portion of long-term liabilities) ratio higher than 1.0x; (iii) total connections (water and sewage)/employees ratio equal to or higher than 520; (iv) EBITDA/debt service ratio equal to or higher than 1.5x; and (v) a shareholders’ equity/total debt ratio equal to or higher than 0.8x.

With respect to our outstanding debentures, the eighth, ninth and eleventh issuances require us to maintain a current debt ratio (current assets divided by current liabilities, excluding the current portion of long-term indebtedness) higher than 1.0x and an EBITDA/financial expenditures ratio equal to or higher than 1.5x. The tenth issuance requires us to maintain (i) an EBITDA/net operational revenue ratio equal to or higher than 38%; (ii) an EBITDA/financial expenditures ratio equal to or higher than 2.35x; and (iii) a net financing and loans/EBITDA ratio equal to or higher than 3.65x.

For further information on these covenants, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness Financing”. If we fail to comply with any of the above covenants, it could impair our ability to finance our capital expenditure program, which could have a material adverse effect on our ability to develop our business and enhance our financial performance.

Additionally, our financial covenants will be affected by the upcoming change in Brazilian accounting standards. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Liquidity and Capital Resources—Capital Sources—Financial Covenants”.

We are subject to cost increases to comply with environmental law requirements and to potential environmental liability that could have a material adverse effect on us.

Our facilities are subject to extensive Brazilian federal, state and municipal laws and regulations and environmental covenants relating to the protection of human health and the environment. See “Business— Government Regulation—Environmental Regulation.” These laws and regulations limit or prohibit emissions or spills of effluents, such as raw sewage, produced in connection with our operations. We could be subject to civil public actions and criminal, administrative and other civil proceedings for non-compliance with environmental laws and regulations, which could expose us to civil penalties and criminal sanctions, such as fines, closure orders and significant indemnification obligations.

Since environmental laws and their enforcement by Brazilian authorities are becoming more stringent, our capital expenditures and expenses for environmental compliance may increase substantially. Expenditures required

23 for compliance with environmental laws and regulations may result in reductions in other strategic investments that we have planned, which could negatively affect us. In addition, due to more stringent enforcement of environmental laws by Brazilian courts, we may be required to pay substantial fines and indemnifications in amounts that may vary widely from those currently anticipated. We are presently a party to a number of civil public actions related to environmental matters, with regard to which we are unable to calculate our estimated amount of potential liability. Any unfavorable judgment in relation to these proceedings or any material unforeseen environmental liabilities may have a material adverse effect on us. For further information on these lawsuits, see “Business—Legal Proceedings”.

Any substantial monetary judgment against us in legal proceedings may have a material adverse effect on us.

We are a party to a number of legal proceedings involving significant monetary claims. These legal proceedings include, among others, civil, environmental, tax, labor, condemnation and other proceedings. As of September 30, 2010, the total value of all outstanding claims was R$23,292.7 million (net of court deposits). A substantial monetary judgment against us in one or more of these legal proceedings may have a material adverse effect on us. Based on advice from our legal counsel, we have provisioned a total aggregate amount of R$1,402.1 million (net of court deposits) as of September 30, 2010 to cover probable losses related to legal proceedings. This provision does not cover all legal proceedings involving monetary claims filed against us, and it may be insufficient to cover our liabilities related to these claims.

Any unfavorable judgment in relation to these proceedings may have a material adverse effect on us. For more information, see “Business—Legal Proceedings”.

Risks Relating to the Notes

Payments on the notes will be junior to our secured debt obligations and to some Brazilian statutory obligations, and a substantial portion of our assets may not be used to secure a judgment .

The notes will constitute our senior unsecured obligations and will rank equal in right of payment with all of our other existing and future unsecured indebtedness. Although the holders of the notes will have a direct, but unsecured, claim on our assets and property, payment on the notes will be subordinated to our secured debt to the extent of the assets and property securing the secured debt. As of September 30, 2010 we had R$7,659.9 million of total debt, of which R$2,500.0 million was secured debt. Holders of the notes may not be able to enforce a judgment against our assets because a substantial portion of our assets is used in the provision of essential public services and, under Brazilian law, would not be subject to attachment or any other legal process. Similarly, if we were declared bankrupt, a significant portion of our assets would not be available for liquidation due to their role in providing essential public services or would be difficult to liquidate due to the limited competitive structure of our industry.

Furthermore, under Brazilian bankruptcy law, our obligations under the notes are subordinated to certain statutory preferences, including claims for salaries, wages, secured obligations, social security, taxes and court fees and expenses. In the event of our liquidation, the statutory preferences will have preference over other claims, including claims by any holder of the notes.

We have recently created several subsidiaries and may create more in the future. Debt issued by the subsidiaries could be structurally senior to the notes.

We may not be able to purchase the notes upon a specified Change of Control.

Upon the occurrence of a specified Change of Control (as defined in “Description of the Notes—Purchase of Notes Upon Change of Control Event”) we will be required to offer to purchase each holder’s notes at a price equal to 101% of their principal amount plus accrued and unpaid interest. At the time of any specified Change of Control, we may not have sufficient financial resources to purchase all of the notes that holders may tender in connection with any Offer to Purchase (as defined in “Description of the Notes—Purchase of Notes Upon Change of Control Event”).

24 Payments under the notes are subject to the receipt of certain governmental authorizations.

The issuance of the notes is subject to certain registrations with the Central Bank, namely (i) registration of the main financial terms under the relevant Electronic Declaratory Registry of Financial Operations (Registro Declaratório Eletrônico de Operações Financeiras (“ROF”) on the Information System of the Central Bank, which must be obtained prior to any such issuance, and (ii) registration of the schedule of payments in connection with any such issuance, which shall occur after the entry of the related proceeds into Brazil. In addition, further authorization from the Central Bank will be required to enable us to remit payments abroad in foreign currency under the notes other than scheduled payments of principal, interest, costs and expenses contemplated by the relevant ROF or to make any payment provided for in such ROF on a date after the 120th day from the payment dates scheduled therein. We cannot assure you that any such special Central Bank authorization would be obtained or that if such authorization is obtained, such authorization would be obtained on a timely basis.

If we are unable to comply with the restrictions and covenants under our debt instruments or the indenture, there could be a default under the terms of these agreements or the indenture, which could cause payment of our debt to be accelerated.

If there were an event of default under one of our debt instruments or the indenture, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately and may be cross-defaulted to other debt. If such indebtedness were to be accelerated, we may have insufficient funds to repay in full any such indebtedness. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Sources—Financial Covenants” for a discussion about the effect of recent accounting changes on our covenants.

Brazilian bankruptcy laws may be less favorable to you than U.S. bankruptcy and insolvency laws.

If we are unable to pay our indebtedness, including our obligations under the notes, then we may become subject to bankruptcy proceedings in Brazil. Brazilian bankruptcy laws are significantly different from, and may be less favorable to creditors than, those of the United States. In addition, in the event of bankruptcy of our Company, all of our debt obligations that are denominated in foreign currency, including the notes, will be converted into reais at the prevailing exchange rate on the date of declaration of bankruptcy by the court.

Judgments of Brazilian courts enforcing our obligations under the notes would be payable only in reais.

If proceedings were brought in the courts of Brazil seeking to enforce our obligations under the notes, we would not be required to discharge our obligations in a currency other than reais. Any judgment obtained against us in a Brazilian court in respect of any payment obligations under the notes would be expressed in reais equivalent to the amount of foreign currency of such sum at the prevailing exchange rate, either: (a) at the date the debt was originally due; (b) at the date on which the judicial proceeding was filed; or (c) at the date the judgment is rendered, in which case the inflation adjustment of the amount due should be made in accordance with the indexes established by the court. We cannot assure you that such rate of exchange will afford you full compensation of the amount invested in the notes plus accrued interest.

Restrictions on the movement of currency out of Brazil may impair the ability of holders of the notes to receive interest and other payments on the notes.

The Brazilian government may impose temporary restrictions on the conversion of Brazilian currency into foreign currencies and on the remittance to foreign investors of proceeds of their investments in Brazil. Brazilian law permits the government to impose these restrictions whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to foresee a serious imbalance.

The Brazilian government imposed remittance restrictions for approximately six months in 1990. Similar restrictions, if imposed in the future, would impair or prevent the conversion of interest payments on the notes from reais into U.S. dollars and the remittance of U.S. dollars abroad to holders of the notes. The Brazilian government may take similar measures in the future.

25 The book-entry registration system of the notes may limit the exercise of rights by the beneficial owners of the notes.

Transfers of interests in the global notes representing the notes may be effected only through book entries at DTC and its direct and indirect participants (including Clearstream and Euroclear). The ability to pledge interests in the notes may be limited due to the lack of a physical certificate. In addition, beneficial owners of interests in global notes may, in certain cases, experience delay in the receipt of payments of principal and interest since the payments will generally be forwarded by the paying agent to DTC, which will then forward payment to its direct and indirect participants, which (if they are not themselves the beneficial owners) will then forward payments to the beneficial owners of the global notes. In the event of the insolvency of DTC or any of its direct and indirect participants in whose name interests in the global notes are recorded, the ability of beneficial owners to obtain timely or ultimate payment of principal and interest on global notes may be negatively affected.

A holder of beneficial interests in the global notes will not have a direct right under the notes to act upon any solicitations that we may request. Instead, holders will be permitted to act only to the extent they receive appropriate proxies to do so from DTC or, if applicable, DTC’s direct or indirect participants. Similarly, if we default on our obligations under the notes, holders of beneficial interests in the global notes will be restricted to acting through DTC, or, if applicable, DTC’s direct or indirect participants. We cannot assure holders that the procedures of DTC or DTC’s nominees or direct or indirect participants will be adequate to allow them to exercise their rights under the notes in a timely manner.

We cannot assure you that a judgment of a U.S. court for liabilities under U.S. securities laws would be enforceable in Brazil, or that an original action can be brought in Brazil against us for liabilities under U.S. securities laws.

We are a corporation organized under the laws of Brazil. All of our directors and officers and some of the advisors named herein reside in Brazil or elsewhere outside the United States, and all or a significant portion of the assets of such persons may be located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States or other jurisdictions outside Brazil upon such persons, or to enforce against such persons judgments predicated upon the civil liability provisions of the U.S. federal securities laws or the laws of such other jurisdictions. See “Enforcement of Civil Liabilities”.

We cannot assure you that an active trading market for the notes will develop.

The notes constitute a new issue of securities. Although application has been made to list the notes on the Luxembourg Stock Exchange and to trade the notes on the Euro MTF Market, we cannot provide you with any assurances regarding the future development of a market for the notes, the ability of holders of the notes to sell their notes or the price at which such holders may be able to sell their notes. If such a market were to develop, the notes could trade at prices that may be higher or lower than the initial offering price depending on many factors, including prevailing interest rates, our results of operations and financial condition, prospects for companies in our industry, political and economic developments in and affecting Brazil, risks associated with Brazilian issuers of these types of securities and the market for similar securities. The initial purchasers of this offering have advised us that they currently intend to make a market in the notes. However, the initial purchasers are not obligated to do so, and any market-making with respect to the notes may be discontinued at any time without notice.

The notes are subject to transfer restrictions.

The notes have not been and will not be registered under the Securities Act or any state securities laws and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. Such exemptions include offers and sales that occur outside the United States in compliance with Regulation S under the Securities Act and in accordance with any applicable securities laws of any other jurisdiction and sales to qualified institutional buyers as defined under Rule 144A under the Securities Act. For a discussion of certain restrictions on resale and transfer, see “Notice to Investors”.

26 USE OF PROCEEDS

We will use the gross proceeds of US$346.8 million from the issuance of the notes to repay certain outstanding indebtedness.

We will use available cash to pay the expenses related to this offering.

27 EXCHANGE RATES

Before March 2005, there were two principal legal foreign exchange markets in Brazil, the commercial rate exchange market and the floating rate exchange market. On March 4, 2005, the Brazilian National Monetary Council (Conselho Monetário Nacional) (“CMN”), enacted Resolution No. 3,265, pursuant to which the floating rate market and the commercial market were unified under the denomination “exchange market,” effective as of March 14, 2005. The regulation allows the purchase and sale of foreign currency and the international transfer of reais by any person or legal entity, regardless of the amount, provided, however, the transaction is legal and subject to certain regulatory procedures.

Since 1999, the Central Bank has allowed the real/U.S. dollar exchange rate to float freely, and, since then, the real/U.S. dollar exchange rate has fluctuated considerably. The real appreciated against the U.S. dollar in 2004, 2005, 2006 and 2007. In 2008, the real depreciated by 30.1% and in 2009, appreciated by 25.5% against the U.S. dollar. As of December 3, 2010, the commercial selling rate for U.S. dollars as reported by the Central Bank was R$1.6917 per U$1.00.

In the past, the Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to allow the real to float freely or will intervene in the exchange rate market through the return of a currency band system or otherwise. The real may depreciate or appreciate against the U.S. dollar substantially in the future. For more information on these risks, see “Risk Factors—Risks Relating to Brazil”.

The following tables set forth the commercial selling rate, expressed in reais per U.S. dollar, for the periods indicated.

Average Year Year-end for year(1) Low High (reais per U.S. dollar) 2005...... 2.3407 2.4125 2.1633 2.7621 2006...... 2.1380 2.1679 2.0586 2.3711 2007...... 1.7713 1.9300 1.7325 2.1556 2008...... 2.3370 1.8335 1.5593 2.5004 2009...... 1.7412 1.9905 1.7024 2.4218

Average Month Period-end for period(2) Low High (reais per U.S. dollar) May 2010...... 1.8167 1.8132 1.7315 1.8811 June 2010...... 1.8015 1.8065 1.7663 1.8658 July 2010 ...... 1.7719 1.7786 1.7665 1.8006 August 2010 ...... 1.7560 1.7596 1.7489 1.7731 September 2010...... 1.6942 1.7187 1.6942 1.7441 October 2010...... 1.7014 1.6835 1.6554 1.7112 November 2010 ...... 1.7161 1.7133 1.6801 1.7336 December 2010 (through December 3, 2010)...... 1.6917 1.6999 1.6917 1.7052

Source: Central Bank (1) Represents the average of the exchange rates on the closing of each business day during the period. (2) Represents the average of the lowest and highest rates in the month.

28 CAPITALIZATION

The following tables set forth our consolidated loans and financing and capitalization at September 30, 2010, derived from our unaudited interim consolidated financial statements prepared in accordance with Brazilian GAAP:

● on an actual historical basis; and

● as adjusted for the sale of the notes in the offering and the receipt of proceeds therefrom before deduction of commissions and expenses in connection with the offering.

You should read the following table in conjunction with our consolidated financial statements included elsewhere in this offering memorandum.

At September 30, 2010 Historical As adjusted(3) (in millions (in millions (in millions (in millions of R$) of US$)(1) of R$) of US$)(1)

Short-term loans and financing ...... 1,163.6 686.8 1,163.6 686.8 Long-term loans and financing...... 6,496.3 3,834.4 7,083.8 4,181.2 Shareholders’ equity...... 11,601.7 6,847.9 11,601.7 6,847.9 Total capitalization(2)...... 19,261.6 11,369.1 19,849.1 11,715.9

(1) Amounts in reais have been translated for convenience only to U.S. dollars at an exchange rate of R$1.6942 per US$1.00, which was the commercial selling rate for U.S. dollars in effect on September 30, 2010, as reported by the Central Bank. (2) Total capitalization corresponds to the sum of long-term loans and financing and shareholders’ equity. (3) Including US$350.0 million aggregate principal amount of notes issued in connection with the offering.

There has been no material change in our capitalization since September 30, 2010, except as disclosed in this offering memorandum.

29 SELECTED FINANCIAL AND OPERATING INFORMATION

The tables below contain selected financial and operating data as of and for each of the periods indicated. You should read the selected financial data in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this offering memorandum.

Our selected consolidated financial information as of and for the years ended December 31, 2009, 2008 and 2007 has been derived from our audited annual consolidated financial statements as of and for the years ended December 31, 2009, 2008 and 2007, prepared in accordance with Brazilian GAAP, which appear elsewhere in this offering memorandum. The selected consolidated financial information as of September 30, 2010 and for the nine months ended September 30, 2009 and 2010 has been derived from our unaudited interim consolidated financial statements as of September 30, 2010 and for the nine months ended September 30, 2010 and 2009 prepared in accordance with Brazilian GAAP, which appear elsewhere in this offering memorandum. Results for interim periods are not necessarily indicative of results for the full year.

Brazilian GAAP

Consolidated Statement of Income Data

30 Consolidated Balance Sheet Data

As of December 31, As of September 30, 2007 2008 2009 2009 2010 2010 (in millions of R$) (in millions (in millions (in millions of US$)(1) of R$) of US$)(1)

Other Financial Information

(1) Amounts in reais have been translated for convenience only to U.S. dollars at an exchange rate of R$1.6942 per US$1.00, which was the commercial selling rate for U.S. dollars in effect on September 30, 2010, as reported by the Central Bank. (2) Short-term and long-term receivables from shareholders, net represent amounts due from the State for water and sewage services. See Note 5 to our consolidated financial statements as of and for the years ended December 31, 2009 and 2008 and Note 5 to our consolidated financial statements as of September 30, 2010 and for the nine months ended September 30, 2010 and 2009, included elsewhere in this offering memorandum. (3) The inclusion of Adjusted EBITDA aims at presenting a measure of our economic operating performance. Our Adjusted EBITDA means net income before financial expenses, net, income tax and social contribution, depreciation and amortization and other operating income (expenses), net. Adjusted EBITDA is not a measure of financial performance recognized under Brazilian GAAP and should not be considered individually or as an alternative to net income, as a measure of our operating performance, or as an alternative to operating cash flows as a measure of liquidity. Our definition of Adjusted EBITDA and EBITDA may not be comparable with the definition of Adjusted EBITDA or EBITDA used by other companies. In our operations, we relate our Adjusted EBITDA to our operating cash flows. We do not include in the calculation of Adjusted EBITDA expenses with interest, taxes, depreciation and amortization, and, therefore, our Adjusted EBITDA works as a general indicator of economic performances and is not affected by debt restructurings, interest rate fluctuations, changes in tax burden or depreciation and amortization levels. Consequently, we believe that Adjusted EBITDA works as an adequate tool to regularly compare our operating performance. Additionally, Adjusted EBITDA is used in covenants related to some of our financial commitments. We believe that Adjusted EBITDA allows a better understanding not only of our financial performance but also of our capacity to satisfy our liabilities and to raise funds for our capital expenditures and working capital. Adjusted EBITDA, however, has limitations that prevent it from being used as a measure of our profitability because it does not take into consideration other costs resulting from our business or certain other costs, which could significantly affect our profits, such as financial expenses, taxes, depreciation, capital expenses and other related charges. The table below sets forth, for the periods indicated, the reconciliation between our net income and Adjusted EBITDA.

31 Year ended December 31, Nine months ended September 30, 2007 2008 2009 2009 2009 2010 2010 (in millions of R$, except (in millions of US$, (in millions of R$, (in millions of US$. ratios) except ratios)(a) except ratios) except ratios)(a) Net income...... 1,055.3 63.6 1,373.9 810.9 916.6 1,074.1 634.0 Financial expenses, net...... (749.0) (268.7) (598.7) (353.4) (456.3) (376.7) (222.3) Foreign exchange gain (losses), 188.0 (438.9) 395.4 233.4 367.1 22.1 13.0 net...... Income tax and social (431.5) (398.2) (564.0) (332.9) (431.5) (576.2) (340.1) contribution ...... Depreciation and amortization...... (616.0) (617.8) (560.7) (331.0) (484.7) (439.3) (259.3) Other operating income (35.1) (1,053.0) (39.5) (23.3) 14.8 5.2 3.1 (expenses), net(b) ...... Adjusted EBITDA...... 2,698.9 2,840.2 2,741.4 1,618.1 1,907.2 2,439.0 1,439.6 Adjusted EBITDA margin(c)...... 45.2% 44.7% 40.7% 40.7% 38.9% 45.5% 45.5% Net debt to Adjusted EBITDA (d)...... 1.93x 2.20x 2.11x 2.11x 2.15x (e) 1.92x (e) 1.92x (e)

Operating Data

As of or for the nine As of or for the year ended months ended September December 31, 30, 2007 2008 2009 2009 2010

32 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements included elsewhere in this offering memorandum. The consolidated financial statements included elsewhere in this offering memorandum have been prepared in accordance with Brazilian GAAP. This offering memorandum contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in “Risk Factors.”

In the following discussion, references to increases or decreases in any period are made by comparison with the corresponding prior period, except as the context otherwise indicates.

Overview

We operate water and sewage systems in the State of São Paulo, including in the city of São Paulo, Brazil’s largest city, and in 364 municipalities in the State of São Paulo, which represent approximately 56% of all municipalities in the State. We also provide water services on a wholesale basis to six additional municipalities in which we do not operate water systems.

The São Paulo metropolitan region, which includes the city of São Paulo, is our most important service region. With a population of approximately 20.4 million, the São Paulo metropolitan region accounted for approximately 76.1%, 75.6% and 69.7% of our gross revenue from sales and services in 2008, 2009 and the nine months ended September 30, 2010, respectively. Approximately 63.2% of the property, plant and equipment reflected on our balance sheet as of September 30, 2010 was located in this region. In an effort to respond to demand in the São Paulo metropolitan region and because the region represents the principal opportunity to increase our net revenue from sales and services, we have concentrated a major portion of our capital expenditure program to expand the water and sewage systems and to increase and protect water sources in this region. Our capital expenditure program is our most significant liquidity and capital resource requirement.

Factors Affecting Our Results of Operations

Our results of operations and financial condition are generally affected by our ability to raise tariffs, general economic conditions in Brazil and, in some previous periods, meteorological conditions.

In 2008, our net income decreased significantly in comparison to our net income in 2007, as we recorded a R$409.1 million provision for losses with respect to the amount that the State owes us relating to the pension benefits paid by us on behalf of the State and a R$535.4 million provision for actuarial liability. In addition, global financial and economic crisis, which commenced in 2008 and whose effects were still present in 2009, resulted in a depreciation of the Brazilian real against the US dollar, which adversely affected our obligations denominated in foreign currency.

In order to ensure its economic and financial strength, we have been working on increasing our efficiency and productivity gains. For this reason, we have attempted to reduce costs. In 2009, we decreased our staff by 9.3% pursuant to an Agreement for the Adjustment of Conduct (Termo de Ajustamento de Conduta) (“TAC”) with the State Public Attorney’s Office (Ministério Público Estadual). Pursuant to the TAC, we laid off retirees who were still working for us and laid off employees representing approximately 2% of our workforce. Our results of operations for the 2009 fiscal year were also affected by a provision for severance payments in the amount of R$146.6 million for employees who resigned in 2009 and employees who will resign in 2010 and 2011.

On June 23, 2010, we entered into a formal agreement with the State and the city of São Paulo to regulate the provision of water and sewage services. This agreement requires us, among other things, (i) to invest at least 13.0% of the gross revenues we obtain from the agreement, net of the contribution for Cofins and Pasep taxes, in the improvement of water and sewage infrastructure in the city of São Paulo; and (ii) to contribute 7.5% of the gross revenues we obtain from the agreement, net of Cofins and Pasep taxes, to the São Paulo Municipal Sanitation Fund,

33 established by Municipal Law No. 14,934/2009. In addition, the agreement provides that the ARSESP, the State agency responsible for regulating the sanitation industry, will ensure that the tariffs charged (a) will adequately compensate us for the services we provide and (b) can be adjusted to restore the original balance between each party’s obligation and economic gain (equilíbrio econômico-financeiro).

Effects of Tariff Increases

Our results of operations and financial condition are highly dependent upon our ability to increase tariffs for our water and sewage services. Since the enactment of Law No. 11,445/2007 dated January 5, 2007, as a general rule, the ARSESP is responsible for setting, adjusting and reviewing our tariffs, taking into consideration, among other factors, the following:

 political considerations arising from our status as a State-controlled company;

 anti-inflation measures enacted by the federal government from time to time; and

 when necessary, the readjustment to maintain the original balance between each party’s obligation and economic gain (equilíbrio econômico-financeiro) under the agreement.

Readjustment of our tariffs continues to be set annually, but such readjustment depends on the parameters established by the Basic Sanitation Law and the ARSESP. The guidelines also establish procedural steps and the terms for annual adjustments. The annual adjustments must be announced 30 days prior to the effective date of the new tariffs, which take effect in September and remain in place for a period of at least 12 months. The most recent annual adjustment, an increase of 4.10%, came into force on September 11, 2010. See “Business—Tariffs”.

The following table sets forth, for the periods indicated, the percentage increase of our tariffs, as compared to three inflation indexes:

Nine months Year ended December 31, ended September 30, 2007 2008 2009 2010

Increase in average tariff(1) ...... 4.1% 5.1% 4.4% 4.1% Inflation – IPC – FIPE ...... 4.4% 6.2% 3.7% 4.0% Inflation – IPCA...... 4.5% 5.9% 4.3% 3.6% Inflation – IGP-M ...... 7.8% 9.8% (1.7)% 7.9%

(1) Since 2007, tariff readjustments have taken effect in September, one month after the readjustment announcement. Sources: Central Bank, Fundação Getúlio Vargas and Fundação Instituto de Pesquisas Econômicas.

Effects of Brazilian Economic Conditions

As a company with all of its operations in Brazil, our results of operations and financial condition are affected by general economic conditions in Brazil, particularly by exchange rate fluctuations, inflation rates and interest rate levels. For example, the general performance of the Brazilian economy affects demand for water and sewage services, and inflation affects our costs and margins. The Brazilian economic environment has been characterized by significant variations in economic growth rates.

General Economic Conditions

At the end of 2007, Brazil had US$180.3 billion in currency reserves. The average unemployment rate in the principal metropolitan regions of Brazil was 7.4% for the year ended December 31, 2007. The unemployment rate decreased to 6.8% for the year ended December 31, 2008, and remained stable at 6.8% for the year ended December 31, 2009, according to IBGE estimates.

34 Fiscal year 2008 was characterized by the worsening of the global financial and economic crisis. As a result, the real depreciated by 31.9% against the U.S. dollar in 2008. Nonetheless, at December 31, 2008, Brazil had R$206.8 billion in currency reserves and a trade surplus of R$24.8 billion. The worsening of the financial crisis during the last quarter of 2008 reduced the activity level of the Brazilian economy. The Brazilian economy experienced higher lending rates, currency devaluation, decreasing stock prices and shrinking industrial production. In order to ease the impact of the financial crisis on the Brazilian economy, the Brazilian government implemented flexible monetary policy and tax relief measures. These measures strengthened the domestic market and were key to the economic recovery.

In 2009, Brazilian GDP decreased 0.2% in comparison with 2008. Nonetheless, Brazil had US$239.1 billion in currency reserves as of December 31, 2009. Brazil’s trade surplus was US$25.3 billion in 2009.

In the six months ended June 30, 2010, Brazilian GDP increased 8.9% in comparison with the six months ended June 30, 2009. As of September 30, 2010, Brazil had US$275.2 billion in currency reserves and its trade surplus for the nine months ended September 30, 2010 was US$1.1 billion.

Interest Rates

Interest rates in Brazil are closely linked to exchange rate fluctuations and inflation rates. High domestic interest rates result in increases in our financial expenses and also negatively affect our ability to obtain financing, on a cost-effective basis, in the domestic capital and lending markets. As a result, we may continue to require substantial amounts of foreign currency-denominated indebtedness in order to satisfy our liquidity and funding requirements, which may increase our exposure to exchange rate fluctuations, as discussed below.

The official interest rate set by the Central Bank, as defined by the Special Settlement and Custody System (Sistema Especial de Liquidação e de Custódia (“SELIC”) overnight rate, was 13.66% as of December 31, 2008. In 2009, in order to boost the economy, the Central Bank reduced the official interest rate significantly, reaching 8.65% as of December 31, 2009. In the nine months ended September 30, 2010, the Central Bank increased interest rates, and the official interest rate, as defined by the SELIC overnight rate target, was 10.75% as of September 30, 2010. We have not utilized any derivative financial instruments or any hedging instruments to mitigate interest rate fluctuations. We do, however, continually monitor market interest rates in order to evaluate the possible need to refinance our debt.

Inflation

Inflation affects our financial performance by increasing our costs of services rendered and operating expenses. In addition, all of our real-denominated debt is indexed to take into account the effects of inflation. Most of our real-denominated debt provides for inflation-based increases in the respective principal amounts of that indebtedness, which are determined by reference to the daily government reference interest rate (Taxa Referencial) (“TR”) plus an agreed margin. We cannot assure you that our tariffs will be increased, in future periods, to offset, in full or in part, the effects of inflation.

Currency Exchange Rates

We had total foreign currency-denominated indebtedness of R$1,746.4 million and R$1,715.7 million as of December 31, 2009 and September 30, 2010, respectively, of which R$81.7 million and R$137.8 million, respectively, relates to our short-term foreign currency-denominated obligations. In the event of significant devaluations of the real in relation to the U.S. dollar or other currencies, the cost of servicing our foreign currency-denominated obligations would increase as measured in reais, particularly as our tariff and other revenue are based solely in reais. In addition, any significant devaluation of the real will increase our financial expenses as a result of foreign exchange losses that we must record. For example, the 31.9% devaluation of the real in 2008 increased our financial expenses and negatively affected our overall results of operations for the year. In contrast, the 25.5% appreciation of the real against the U.S. dollar in 2009 led to a foreign exchange gain of R$395.4 million.

35 We manage our indebtedness portfolio closely to decrease the cost of servicing our indebtedness as a whole and our exposure to exchange rate fluctuations. We do not speculate in foreign currencies, and we do not have any exposure to derivatives tied to foreign currencies.

The following table shows the fluctuation of the real against the U.S. dollar, the period-end exchange rates and average exchange rates as of or for the periods indicated:

Nine months ended Year ended December 31, September 30, 2007 2008 2009 2010 Devaluation (appreciation) of the real versus U.S. dollar...... (17.15)% 31.9% (25.49)% (2.70)% Period-end exchange rate – US$1.00...... R$1.7713 R$2.3370 R$1.7412 R$1.6970 Average exchange rate – US$1.00(1) ...... R$1.9483 R$1.8375 R$1.9976 R$1.7691

(1) Represents the average for period indicated. Source: Central Bank.

From time to time, we may enter into forward exchange transactions and financial funding transactions in reais to mitigate foreign currency exposure. In addition, we have monitored, overseen and controlled our foreign currency-denominated indebtedness, taking advantage of market opportunities to improve the profile of our indebtedness and reduce our costs. As of September 30, 2010, we had no outstanding forward exchange transactions.

Effects of Drought

We operate in a region of Brazil that has been prone to droughts, although historically droughts have not impacted all of our water supply systems equally. Brazil experienced a prolonged and severe drought during 2000 and 2001. As a result, from mid-June to mid-September of 2000, we rationed water in the south of the São Paulo metropolitan region, affecting approximately 3.5 million people, or approximately 20% of the total population of this region, which reduced our total water production by approximately 8%. From April 2001 through January 2002 and from October to December 2003, we also rationed water in certain regions of the São Paulo metropolitan region, but on a much smaller scale. This rationing on a smaller scale caused our total water production volume to be reduced by only 0.8%. The effects of the drought continued to affect our systems through 2004. Due to the water usage reduction bonus program that we operated from March to September 2004, when rainfall was extremely low and our reservoirs were at correspondingly low levels, and the return to normal rainfall levels that occurred throughout 2004 and early 2005, the conditions of our reservoirs improved in 2005. In 2006, rainfall was sufficient to enable us to maintain our reservoirs at levels reflecting the historic average. In 2007 and 2008, rainfall exceeded the levels of previous years, increasing the volume of water held in our reservoirs and thereby providing a cushion to meet demand. In 2009, rainfall levels were higher than the historic average and by the end of 2009, our reservoirs had a utilization rate of 87.0%, compared to a 50.0% and 41.0% utilization as of December 31, 2008 and 2007, respectively. As of September 30, 2010, our reservoirs had a utilization rate of 77.3%.

Changes in Brazilian GAAP

In 2008 and 2009, the CPC issued over 40 standards, interpretations and application guidance documents in order to converge Brazilian GAAP to IFRS, except in a limited number of areas in which there are legal restrictions preventing complete convergence. Such legal restrictions do not prevent consolidated Brazilian GAAP financial statements from complying with IFRS, but limit certain options permitted by IFRS. The new Brazilian accounting rules became effective for year-end financial statements relating to any fiscal year starting as of or after January 1, 2008 and have been applied to our consolidated financial statements as of and for the years ended December 31, 2007, 2008 and 2009 and as of September 30, 2010 and for the nine months ended September 30, 2010 and 2009.

36 2009, we will be required to republish this information in conformity with the standards effective for the year ending December 31, 2010 before we publish our annual financial statements as of and for the year ended December 31, 2010. Upon republishing our quarterly financial information for 2010, we will also be required to republish all comparative information presented (including comparative information for 2009) in conformity with the standards.

We are currently evaluating possible adjustments resulting from the standards that may affect our financial statements. For a discussion of the potential impact of these changes on the financial covenants under our outstanding indebtedness, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Sources—Financial Covenants”.

Brazilian GAAP differs in significant respects from IFRS, as issued by the IASB. Our consolidated financial statements prepared in accordance with Brazilian GAAP contained in this offering memorandum would differ from those prepared under IFRS, including the consolidated financial statements prepared under IFRS included in our annual report on Form 20-F filed with the SEC. No reconciliation to IFRS for any of the consolidated financial statements presented in this offering memorandum has been prepared for the purpose of this offering of notes. There can be no assurance that reconciliations would not identify material quantitative differences as well as disclosures and presentation differences between the consolidated financial statements included in this offering memorandum, as prepared in accordance with Brazilian GAAP, and the consolidated financial statements as prepared under IFRS. See “Annex A—Summary of Principal Differences Between Brazilian GAAP and IFRS” for a discussion of the principal differences between Brazilian GAAP and IFRS.

Critical Accounting Estimates and Assumptions

We make estimates and assumptions concerning the future. The estimates and assumptions that have a significant risk of causing material adjustment to the carrying amount of our assets and liabilities within the next financial year are addressed below.

Deferred Income and Social Contribution Taxes

Deferred tax assets and liabilities are recognized based on temporary differences between the accounting values in the consolidated financial statements and the tax base of the assets and liabilities. Deferred taxes represent tax credits in respect of provisions deductible in the future.

We prepare an analysis of estimated future taxable income discounted at present value, based on our budget, business plan and certain estimates, in order to demonstrate our capacity to use the credit during a period no greater than ten years.

Allowance for Doubtful Accounts

We record an allowance for doubtful accounts in an amount that our management considers sufficient to cover probable losses, based on an analysis of customer accounts receivable, in accordance with the accounting policy stated in Note 2.2(g) to our consolidated financial statements as of and for the years ended December 31, 2009 and 2008. Provisions for the allowance for doubtful accounts are included in selling expenses, net of recoveries. The net charge to this allowance was R$323.3 million, R$336.3 million, R$308.2 million and R$257.9 million in 2007, 2008, 2009 and the nine months ended September 30, 2010, respectively.

The methodology for determining the allowance for doubtful accounts requires significant estimates, considering a number of factors, including historical collection experience, current economic trends, estimates of forecast write-offs, the aging of the accounts receivable portfolio and other factors. While we believe that the estimates used are reasonable, actual results could differ from those estimates.

In addition, we have substantial assets consisting of amounts owed by the State. These amounts consist primarily of accounts receivable for services and reimbursement for payments we have made, on behalf of the State, to former employees of the State-owned companies that merged to form our Company. As of September 30, 2010, we had recorded provisions for losses under “Receivables from shareholder” totaling R$510.3 million,

37 corresponding to the portion of the outstanding balance due to us by the State relating to the pension benefits paid by us on behalf of the State in excess of the amount the State has agreed to reimburse. See “—Pension Plans—Plan G0”). Additional information on the accounts receivable from the São Paulo State government is disclosed in Note 5 to our consolidated financial statements as of and for the years ended December 31, 2009 and 2008.

We recorded an allowance for doubtful accounts for water and sewage services in the amount of R$12.4 million as of September 30, 2010.

Fair Value of Financial Instruments

In accordance with CPC rules, management estimates the fair value of financial instruments using information available in the market and appropriate estimating methodologies. Management uses considerable personal judgment to interpret the information available in the market when developing estimates of fair value. Therefore, the estimates presented may not necessarily indicate the value that would be obtained for the financial instruments if they were realized on the market. The use of different market assumptions and/or estimating methodologies could have a material effect on the estimated fair values.

Indemnities Receivable

Indemnities receivable is a long-term asset representing amounts receivable from the municipalities of Diadema and Mauá as indemnification for their unilateral termination of our water and sewage service concessions in 1995. As of each of December 31, 2009 and September 30, 2010, this asset amounted to R$146.2 million.

Prior to their termination, pursuant to our concession contracts, we invested in the construction of water and sewage systems in these municipalities to meet our concession service commitments. Upon the unilateral termination of the concessions by the municipalities of Diadema and Mauá, our assets were impounded by the municipal authorities, which took on the responsibility of providing water and sewage services in these areas. At that time, we reclassified our property, plant and equipment balances relating to the impounded assets as long-term assets (indemnities receivable) and recorded impairment charges to reduce the carrying value of the assets to the estimated recoverable amounts which we had contractually agreed as fair compensation with these municipal authorities.

Our rights to recover these amounts are being disputed by the municipalities, and no amounts have been received to date. Based on the advice of legal counsel, we continue to believe that we have the right to receive those amounts, and we continue to monitor the status of the legal proceedings. The ultimate amounts to be received however, if any, will most likely be subject to a final court decision. Therefore, actual amounts received could differ from those recorded. For more information, see Note 6 to our consolidated financial statements as of and for the years ended December 31, 2009 and 2008.

Valuation of Long-Lived Assets

As of September 30, 2010, we had property, plant and equipment, construction in-progress and intangible assets of R$5,845.1 million, R$3,061.8 million and R$9,074.1 million, respectively.

We review long-lived assets, primarily buildings, water and sewage system assets and concession intangible assets to be held and used in our business, for the purpose of determining and measuring impairment on a recurring basis or when events or changes in circumstances indicate that the carrying value of an asset or group of assets may not be recoverable. According to Brazilian GAAP, we evaluate possible impairment by determining whether projected future operating income is sufficient to absorb the depreciation or amortization of long-lived assets, within the context of the balance sheet as a whole.

Studies supporting the write-offs for obsolescence and abandonment of projects are conducted in the accounting period of the write-offs based on discounted cash flow projections, and approved by our board of directors. We monitor the carrying value of our property, plant and equipment on an on-going basis and adjust the net book value to assure future projected operations will be sufficient to recover the carrying value of the assets.

38 In evaluating impairment of our long-lived assets, we make significant assumptions and estimates regarding matters that are inherently uncertain, including projections of future operating income and cash flows, future growth rates and the remaining useful lives of the assets, among other factors. In addition, projections are computed over an extended period of time, which subjects those assumptions and estimates to an even larger degree of uncertainty. While we believe that the estimates we use are reasonable, the use of different assumptions could materially affect our valuations.

Depreciation of Property, Plant and Equipment

Depreciation of our property, plant and equipment, primarily buildings, water and sewage service and other assets acquired, is provided using the straight-line method based on the estimated useful lives of the underlying assets. While we believe that our estimates of current remaining estimated lives is reasonable, the use of different assumptions and estimates and changes in future circumstances, could affect the remaining useful lives of our asset, which could have a significant impact on our results of operations in the future.

Provision for Contingencies

As of September 30, 2010, we were party to judicial and administrative proceedings, relating to civil, environmental and tax matters, amounting to R$1,402.1 million (excluding the amount of R$106.1 million related to court deposits) with respect to which we considered the risk of loss was probable. As of that date, proceedings with respect to which we considered the risk of loss as possible amounted to R$2,255.0 million, and those with respect to which we considered the risk of loss as remote amounted to R$19,635.6 million.

We are a party to a number of legal proceedings involving significant monetary claims. These legal proceedings include, among other types, disputes with customers and suppliers and tax, labor, civil, environmental and other proceedings. For a more detailed discussion of these legal proceedings, see Note 15 to our consolidated financial statements as of and for the years ended December 31 2009 and 2008. We accrue for probable losses resulting from these claims and proceedings when we determine that the likelihood that a loss has occurred is probable and the amount of such loss can be reasonably estimated. Therefore, we are required to make judgments regarding future events for which we often seek the advice of legal counsel. As a result of the significant judgment required in assessing and estimating these provision for contingencies, actual losses realized in future periods could differ significantly from our estimates and could exceed the amounts which we have provisioned.

Pension Plans

Plan G1

We sponsor a funded defined-benefit pension and benefits fund (“Plan G1”) which is operated and administered by SABESPREV—Fundação SABESP de Seguridade Social.

Pursuant to Brazilian GAAP, prior to January 1, 2002, we recorded pension expense on an accrual basis based on our contributions to the plan. Effective January 1, 2002, in accordance with the issuance of a new accounting standard, we began accounting for our actuarial obligation under Plan G1. As permitted under this standard, we amortized the transition liability related to the actuarial value of our obligation at the date of adoption of the new standard over a period of five years, which was recorded in our statements of operations under Brazilian GAAP as an extraordinary item, net of the related tax impact in the amount of R$266.1 million. For 2007, 2008, 2009 and the nine months ended September 30, 2010, pension costs charged to income totaled R$55.9 million, R$67.1 million, R$73.1 million and R$40.8 million, respectively, and these amounts were charged to cost of services rendered, general and administrative expenses and selling expenses in the respective period. As of December 31, 2009 and September 30, 2010, our obligation under Plan G1 was R$480.1 million and R$506.7 million, respectively. See Note 13 to our consolidated financial statements as of and for the years ended December 31, 2009 and 2008 and Note 13 to our consolidated financial statements as of September 30, 2010 and for the nine months ended September 30, 2010 and 2009.

39 In order to address the actuarial deficit under the defined benefit plan, we adopted a new defined contribution plan “SABESPREV MAIS”, which was approved by the National Superintendence of Supplemental Pension – PREVIC. The deficit will be settled by the sponsor and by the participants in the same proportion as their normal contribution. The participants of the current defined benefit plan will have the option to migrate to the new defined contribution plan. The sponsor will make additional contributions as a means to incentivize participants to migrate from the defined benefit to the defined contribution plan. Under the new plan, the sponsor will continue to make monthly contributions to the individual account in amount equal to the participants’ basic contribution.

In June 2010, the Company and SABESPREV implemented a process to allow the participants of the G1 defined benefit plan to move to the SABESPREV MAIS defined contribution plan, with the aim of reducing the deficit of the G1 defined benefit plan.

As of September 30, 2010 there were the 16,807 participants in the G1 defined benefit plan and 3,120 participants in the SABESPREV MAIS defined contribution plan.

Based on an actuarial calculation, as of September 30, 2010, the total actuarial obligation in connection with the participants that migrated from the G1 defined benefit plan to the SABESPREV MAIS defined contribution plan up to September 30, 2010, was R$25.3 million. The Company had paid total contributions in the amount of R$8.2 million to SABESPREV as of September 30, 2010.

As of September 30, 2010, based on the actuarial calculation of an independent consultant, the total actuarial obligation in connection with the G1 defined benefit plan was R$506.7 million, which was recognized in noncurrent liabilities.

Plan G0

Pursuant to a law enacted by the State, some of the State’s employees who provided service to us prior to May 1974 and retired as employees of our Company acquired a legal right to receive supplemental pension payments (which rights are referred to as “Plan G0”). These amounts are paid by us on behalf of the State and are claimed as reimbursements from the State. The State has been reimbursing us monthly for the portion of the retirement and pension payments that it acknowledged it owes us. However, the State has refused to reimburse us for amounts paid by us between March 1986 and November 2001 that the State claims are in excess of the amount that it believes we were legally required to pay to beneficiaries of Plan G0, which we refer to as the disputed amount.

The pension expenses and future obligations related to Plan G0 are partially recorded under Brazilian GAAP as follows. We have recorded a provision for losses under “Receivables from shareholder” totaling R$510.3 million as of September 30, 2010 in respect of the disputed amount because it is not certain that the State will reimburse this amount. In addition, as of September 30, 2010, we had recorded a provision for actuarial liability in the amount of R$493.5 million in respect of future supplemental pension payments under Plan G0 that the State does not believe it is responsible for paying.

As of December 31, 2008 and 2009, the pension benefit obligations of Plan G0 totaled R$1,338.6 million and R$1,157.1 million, respectively. For a detailed explanation on the pension benefit obligations refer to Note 13 to our consolidated financial statements as of and for the years ended December 31, 2009 and 2008. The next calculation of the pension benefit obligations under Plan G0 will be made as of December 31, 2010.

Assumptions

Accounting for these pension benefits under Brazilian GAAP requires an extensive use of assumptions, including those related to the inflation adjusted discount rate, expected return on plan assets, the expected rate of future compensation increases received by our employees, mortality rates and turnover. We review each assumption annually, with the assistance of our actuarial consultant who provides guidance in establishing the assumptions. The assumptions are selected to represent the weighted average expected experience over time and may differ in any one year from actual experience due to changes in the capital markets and the overall economy, regulatory events,

40 judicial rulings and higher or lower actual rates of withdrawal, turnover or mortality among our participating employees. While we believe that our assumptions are appropriate, differences in actual experience or changes in assumptions could affect the amount of pension expense that we recognize.

The present value of our pension obligations was based on a discount rate of 10.85% for 2007, 2008 and 2009. Our pension obligation and expense increases as the discount rate reduces.

Our expected return on assets for Plan G1 is determined by evaluating the asset class return expectations with our advisors, as well as actual, long-term historical results of our asset returns. For 2007, 2008 and 2009 and for the nine months ended September 30, 2010, we used an expected rate of return on assets assumption of 10.85%. The expected return on assets assumption is based on a targeted allocation of investments in accordance with the investment strategies of the plans. We believe that this targeted allocation will, on average, approximate actual long-term asset allocation.

Certain Transactions with Controlling Shareholder

Reimbursement Due from the State

Reimbursement due from the State for pensions paid represent supplementary pensions (Plan G0) that we pay, on behalf of the State, to former employees of the State-owned companies which merged to form our Company. These amounts must be reimbursed to us by the State, as primary obligor.

In November 2008, we entered into the third amendment to the agreement with the State relating to payments of pension benefits made by us on its behalf. The State acknowledged that it owed us an outstanding balance of R$915.3 million as of September 30, 2008, relating to payments of pension benefits made by us on its behalf. We provisionally accepted the reservoirs in the Alto Tietê System as partial payment in the amount of R$696.3 million, subject to the transfer of the property rights of these reservoirs to us. Since November 2008, the State has been paying the remaining balance in the amount of R$219.0 million in 114 successive monthly installments. As of September 30, 2010, we had recorded provisions for losses under “Receivables from shareholder” totaling R$510.3 million, corresponding to the portion of the outstanding balance due to us by the State relating to the pension benefits paid by us on behalf of the State in excess of the amount the State has agreed to reimburse. See “—Pension Plans—Plan G0). See Note 5 to our consolidated financial statements as of and for the years ended December 31, 2009 and 2008 and “Principal Shareholders and Related Party Transactions”.

Accounts Receivable from the State for Water and Sewage Services Rendered

Certain of these accounts receivable have been overdue for a long period, and we do not reserve against such accounts receivable as we fully expect to recover these amounts and loss is not considered probable. We have entered into agreements with the State with respect to these accounts receivable. For further information on these agreements, see Note 5 to our consolidated financial statements as of and for the years ended December 31, 2009 and 2008 and “Principal Shareholders and Related Party Transactions”.

Use of Certain Assets Owned by the State

We currently use certain reservoirs in the Billings and Guarapiranga reservoirs which are owned indirectly by the State. We currently do not pay any fees with respect to the use of these reservoirs. However, we are responsible for maintaining and meeting the operating costs of these reservoirs. If these facilities had not been made available for our use, we would have had to obtain water from more distant sources, which would be more costly. The State does not incur operating costs on our behalf.

The arrangement for use of the Billings and Guarapiranga reservoirs is provided for through a grant issued by the DAEE. We have a right to use these reservoirs so long as we remain responsible for maintaining and meeting their operating costs.

41 Results of Operations

The following table sets forth, for the periods indicated, certain items in our statement of operations, each expressed as a percentage of net revenue from sales and services:

Year ended December 31, Nine months ended September 30, 2007 2008 2009 2009 2010 (in (%) (in (%) (in (%) (in (%) (in (%) millions millions millions millions millions of R$) of R$) of R$) of R$) of R$) Net revenue from sales and services...... 5,970.8 100.0 6,351.7 100.0 6,730.5 100.0 4,906.0 100.0 5,357.4 100.0 Cost of sales and services ...... (2,695.7) (45.1) (2,831.8) (44.6) (3,076.2) (45.7) (2,427.4) (49.5) (2,327.2) (43.4) Gross profit...... 3,275.1 54.9 3,519.9 55.4 3,654.3 54.3 2,478.6 50.5 3,030.2 56.6 Selling expenses ...... (639.6) (10.7) (718.9) (11.3) (801.3) (11.9) (597.2) (12.2) (630.7) (11.8) Administrative expenses...... (552.6) (9.3) (578.6) (9.1) (672.3) (10.0) (458.9) (9.4) (399.8) (7.5) Other operating income (expenses), net...... (35.1) (0.6) (1,053.0) (16.6) (39.5) (0.6) 14.8 0.3 5.2 0.1 Foreign exchange gains (losses) ...... 188.0 3.1 (438.9) (6.9) 395.4 5.9 367.1 7.5 22.1 0.4 Financial expenses, net ...... (749.0) (12.5) (268.7) (4.2) (598.7) (8.9) (456.3) (9.3) (376.7) (7.0) Income before income tax and social contribution ...... 1,486.8 24.9 461.8 7.3 1,937.9 28.8 1,348.1 27.5 1,650.3 30.8 Income tax and social contribution...... (431.6) (7.2) (398.2) (6.3) (564.0) (8.4) (431.5) (8.8) (576.2) (10.8) Net income ...... 1,055.3 17.7 63.6 1.0 1,373.9 20.4 916.6 18.7 1,074.1 20.0

Nine Months Ended September 30, 2010, Compared with Nine Months Ended September 30, 2009

Net Revenue from Sales and Services

Net revenue from sales and services increased by R$451.4 million, or 9.2%, to $5,357.4 million in 2010 from R$4,906.0 million in 2009.

Net revenue from sales and services relating to water services increased by R$249.3 million, or 9.0%, to R$3,034.4 million in 2010 from R$2,785.1 million in 2009. This increase was principally due to:

 an average 4.1% increase in the volume of water invoiced in the nine months ended September 30, 2010; and

 the effects of the 4.43% tariff increase in September 2009 and the 4.1% tariff increase in September 2010.

Net revenue from sales and services relating to sewage services increased by R$202.1 million, or 9.5%, to R$2,323.0 million in 2010 from R$2,120.9 million in 2009. This increase was principally due to:

 an average 5.0% increase in the volume of sewage services invoiced in the nine months ended September 30, 2010; and

 the effects of the 4.43% tariff increase in September 2009 and the 4.1% tariff increase in September 2010.

Cost of Sales and Services

The cost of sales and services decreased by R$100.2 million, or 4.1%, to R$2,327.2 million in the nine months ended September 30, 2010 from R$2,427.4 million in the nine months ended September 30, 2009. As a percentage of net revenue from sales and services, cost of sales and services decreased to 43.4% in the nine months ended September 30, 2010 from 49.5% in the nine months ended September 30, 2009.

42 The decrease in costs of sales and services was principally due to the following factors:

 a decrease of R$142.5 million, or 15.6%, in salaries and related charges, mainly due to (i) a R$125.2 million decrease as a result of the reduction in our staff pursuant to the TAC, with the State Public Attorney’s Office (Ministério Público Estadual). Pursuant to the TAC, we laid off retirees who were still working for the Company and laid off approximately 2% of the Company’s workforce; (ii) a decrease of R$14.8 million related to adjustment in the profit sharing program for 2010; (iii) a decrease of R$12.0 million related to our defined benefit plan due to the migration of some employees to our defined contribution plan. The decrease in expenses relating to our defined contribution plan was offset in part by an increase in expenses amounting to R$10.1 million related to our defined contribution plan;

 a decrease of R$44.9 million, or 9.6%, due to the review of the estimated useful lives of fixed assets which resulted in an increase in the estimated useful lives;

 a decrease of R$8.4 million, or 1.9%, in outsourced services, mainly due to (i) the reduction of R$50.8 million in June 2009 related to maintenance of municipal public properties, which was established in the agreement with the city of São Paulo. This decrease was offset in part by (i) an increase in expenses for network maintenance and connection of R$17.9 million; (ii) an increase of R$13.8 million related to pavement expenses; (iii) an increase of R$7.5 million relating to several services, such as technical information provided in real time, decontamination of streamlets and improvement of the central telephone system of our operating units, among others; and

 a R$6.5 million, or 6.2%, decrease in the cost of water treatment products due to the use of new treatment chemicals.

The decrease in costs of sales and services was partially offset by:

 an increase of R$76.5 million, or 232.6%, in general expenses, mainly due to the payment of R$80.1 million in accordance with the Company’s obligation to contribute 7.5% of the gross revenues it obtains from its agreement with the State and the city of São Paulo, net of Cofins and Pasep taxes, to the São Paulo Municipal Sanitation Fund (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting our Results of Operations”); and

 an increase of R$31.9 million, or 8.9%, in the electricity costs due to (i) an increase in tariffs of 5.8% and (ii) an increase in the average consumption of electricity of 1.7%.

Gross Profit

As a result of the factors discussed above, gross profit increased by R$551.6 million, or 22.3%, to R$3,030.2 million in the nine months ended September 30, 2010 from R$2,478.6 million in the nine months ended September 30, 2009. As a percentage of net revenue from sales and services, gross profit increased to 56.6% in the nine months ended September 30, 2010 from 50.5% in the nine months ended September 30, 2009.

Selling Expenses

Selling expenses increased by R$33.5 million, or 5.6%, to R$630.7 million in the nine months ended September 30, 2010 from R$597.2 million in the nine months ended September 30, 2009. As a percentage of net revenue from sales and services, selling expenses increased to 11.8% in the nine months ended September 30, 2010 from 12.2% in the nine months ended September 30, 2009.

The increase in selling expenses was primarily due to the following factors:

 an increase of R$23.3 million, or 9.9%, in the allowance for doubtful accounts; and

43  an increase of R$22.8 million, or 15.8%, in outsourced services expenses, principally due to (i) a R$15.7 million provision related to future payment to the Prefeitura Municipal de São Paulo (“PMSP”), pursuant to the agreement signed between the Company and PMSP on June 23, 2010; (ii) R$8.4 million in billing services, mainly related to an increase in network connections, which resulted in an increase in outsourcing expenses.

The increase in selling expenses was partially offset by a R$17.2 million, or 10.6%, decrease in salaries and related charges in the nine months ended September 30, 2010, due mainly to the reduction in our staff pursuant to the TAC, which resulted in a decrease of R$16.4 million in the nine months ended September 30, 2010.

Administrative Expenses

Administrative expenses decreased by R$59.1 million, or 12.9%, to R$399.8 million in the nine months ended September 30, 2010 from R$458.9 million in the nine months ended September 30, 2009. As a percentage of net revenue from sales and services, administrative expenses decreased to 7.5% in the nine months ended September 30, 2010 from 9.4% in the nine months ended September 30, 2009.

The decrease in administrative expenses was primarily due to:

 a decrease of R$53.0 million, or 31.9%, in general expenses due to a reduction in contingency provisions in the nine months ended September 30, 2010;

 a decrease of R$14.1 million, or 11.0%, in salaries and related charges in the nine months ended September 30, 2010, due to a reduction in our staff pursuant to the TAC, which resulted in a decrease of R$10.7 million in the nine months ended September 30, 2010.

The decrease in administrative expenses was partially offset by an increase of R$7.1 million, or 16.3%, related to tax expenses, primarily due to the increase of R$8.2 million related to municipal taxation “Imposto sobre a Propriedade Predial e Territorial Urbana – IPTU”.

Other Operating Income, Net

Other operating income, net decreased by R$9.6 million, or 64.9%, to R$5.2 million in the nine months ended September 30, 2010 from R$14.8 million in the nine months ended September 30, 2009. The decrease was due to a R$14.0 million provision related to the employees who migrated from our defined benefit plan to our defined contribution plan, offset in part by R$4.8 million in revenue from incentives received from the federal government related to the PURA program.

Foreign Exchange Gains (Losses), Net

Foreign exchange gain, net decreased by R$345.0 million, or 94.0%, to R$22.1 million in the nine months ended September 30, 2010 from R$367.1 million in the nine months ended September 30, 2009 The change was primarily due to the 2.7% depreciation of the U.S. dollar against the real in the nine months ended September 30, 2010, compared to the 23.9% depreciation of the U.S. dollar against the real in the nine months ended September 30, 2009.

Financial Expenses, Net

Financial expenses, net, consist primarily of interest on our indebtedness and foreign exchange losses (or gains) in respect of our indebtedness, offset partially by interest income on cash and cash equivalents and inflation- based indexation accruals, mainly relating to agreements entered into with some customers to settle overdue accounts receivable.

Financial expenses, net decreased by R$79.6 million, or 17.4%, to R$376.7 million in the nine months ended September 30, 2010 from R$456.3 million in the nine months ended September 30, 2009. As a percentage of

44 net revenues from sales and services, financial expenses, net decreased to 7.0% in the nine months ended September 30, 2010 from 9.3% in the nine months ended September 30, 2009. The decrease was principally due to:

 a decrease of R$142.5 million in provisions for contingencies, principally due to (i) the recording of interest expenses related to a proceeding brought by one of our suppliers, Stelgel – Sociedade Técnica de Engenharia S.A., amounting to R$66.0 million in the nine months ended September 30, 2009, due to the fact that this contingency was considered as possible loss before 2009 and it was changed to a probable loss in the nine months ended September 30, 2009, and (ii) the recording of R$16.3 million in interest expenses related to a proceeding brought by SESC – Serviço Social do Comércio in the nine months ended September 30, 2009;

 a decrease of R$10.8 million in interest expenses related to the decrease in the spread applicable to our IADB AB Loan financing, which had a spread between 4.5% and 5.0% in 2009, which changed to 2.4% to 2.9% after June 2010;

 an increase of R$56.5 million in income from monetary indexation due principally to the renegotiation of debts with some municipalities, mainly Taubaté and Ferraz de Vasconcelos, and indexation of court deposits; and

 an increase of R$29.9 million in interest and other financial income due to the increase in cash and cash equivalents.

The decrease in financial expenses, net was partially offset by:

 an increase of R$70.7 million in interest expenses related to debentures, due to the increase in the IGPM rate of 7.9% from January to September 2010 compared to the decrease in the IGPM rate of 1.6% during the same period in 2009;

 an increase of R$52.5 million in interest expenses related to domestic loans, mainly due to the increase in loans and financing, such as tenth, eleventh and twelfth issuances of debentures and the fifth issuance of promissory notes; and

 an increase in other monetary indexation of R$21.6 million, mainly due to the indexation of financial contingencies amounting to R$19.9 million.

Income Before Income Tax and Social Contribution

As a result of the factors discussed above, income before income tax and social contribution increased by R$302.2 million, or 22.4%, to R$1,650.3 million in the nine months ended September 30, 2010 from R$1,348.1 million in the nine months ended September 30, 2009. As a percentage of net revenue from sales and services, our income before income tax and social contribution increased to 30.8% in the nine months ended September 30, 2010 from 27.5% in the nine months ended September 30, 2009.

Income Tax and Social Contribution

Income tax and social contribution expenses increased by R$144.7 million, or 33.5%, to R$576.2 million in the nine months ended September 30, 2010 from R$431.5 million in the nine months ended September 30, 2009. This increase was primarily due to the increase in our income before income tax and social contribution in the nine months ended September 30, 2010.

Net Income

As a result of the factors discussed above, net income increased by R$157.5 million, or 17.2%, to R$1,074.1 million in the nine months ended September 30, 2010 from R$916.6 million in the nine months ended September 30, 2009.

45 Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Net Revenue from Sales and Services

Net revenue from sales and services increased by R$378.8 million, or 6.0%, to R$6,730.5 million in 2009 from R$6,351.7 million in 2008.

Net revenue from sales and services relating to water services increased by R$201.7 million, or 5.6%, to R$3,817.5 million in 2009 from R$3,615.8 million in 2008. This increase was principally due to:

 an average 2.1% increase in the volume of water invoiced in 2009; and

 the effects of the 5.1% tariff increase in September 2008 and the 4.4% tariff increase in September 2009.

Net revenue from sales and services relating to sewage services increased by R$177.1 million, or 6.5%, to R$2,913.0 million in 2009 from R$2,735.9 million in 2008. This increase was principally due to:

 an average 3.2% increase in the volume of sewage services invoiced in 2009; and

 the effects of the 5.1% tariff increase in September 2008 and the 4.4% tariff increase in September 2009.

The increase was partially offset by:

 a decrease in the volume produced in the industrial segment due to the termination or decrease in the production of certain industrial units and the execution of fixed demand agreements; and

 a decrease in the volume invoiced to both State and municipal entities, due to incentives created to decrease water consumption under the Rational Use of Water Program (Programa de Uso Racional da Água (“PURA”) in state and municipal entities, pursuant to our agreement with the city of São Paulo.

Cost of Sales and Services

The cost of sales and services increased by R$244.4 million, or 8.6%, to R$3,076.2 million in 2009 from R$2,831.8 million in 2008. As a percentage of net revenue from sales and services, cost of sales and services increased to 45.7% in 2009 from 44.6% in 2008.

The increase in costs of sales and services was principally due to the following factors:

 an increase of R$152.1 million, or 14.8%, in salaries and related charges, due to (i) annual salary adjustments of 6.7% that came into effect in May 2009; and (ii) an increase in payments under our program to dismiss employees already retired, but that are still working for us, comprising prior notice payments, severance payments and related charges totaling R$67.0 million;

 an increase of R$108.7 million, or 24.5%, in outsourced services, mainly due to an increase of (i) R$41.2 million in sewage and water network and connections maintenance; (ii) R$29.6 million in preventive and corrective maintenance of water and sewage treatment stations; (iii) R$10.4 million in a provision for expenditures that we are committed to under our agreement with the city of São Paulo; (iv) R$7.0 million in technical services; (v) R$6.2 million related to the rental of vehicles, which started in 2008, in substitution of our own fleet; and (vi) R$6.1 million in treatment and transportation of sludge;

46  an increase of R$25.9 million, or 5.7%, in energy costs, principally as a consequence of an average increase of 8.5% in energy tariffs which was partially offset by a decrease of 1.6% in our energy consumption;

 an increase of R$8.7 million, or 23.9%, in general expenses, mainly due to payments to some municipalities to exploit water supply and sewage services that amounted to R$5.1 million in 2009, and general insurance expenses of R$0.7 million;

 an increase of R$6.3 million, or 4.7%, in materials costs, mainly due to: (i) water and sewage network and connections materials resulting from an increase in connections maintenance amounting to R$3.3 million; (ii) R$1.0 million in costs associated with materials used for the maintenance of water and sewage treatment stations and an increase in works related to the loss reduction program; and (iii) R$1.0 million in miscellaneous materials costs for repairs and maintenance work; and

 a R$3.6 million increase in the cost of water treatment products due to the increased use of new treatment chemicals.

The increase in costs of sales and services was partially offset by a decrease of R$60.9 million, or 10.2%, in depreciation and amortization, mainly due to the revision of the useful lives of property, plant and equipment that occurred in 2009.

Gross Profit

As a result of the factors discussed above, gross profit increased by R$134.4 million, or 3.8%, to R$3,654.3 million in 2009 from R$3,519.9 million in 2008. As a percentage of net revenue from sales and services, gross profit decreased to 54.3% in 2009 from 55.4% in 2008.

Selling Expenses

Selling expenses increased by R$82.4 million, or 11.5%, to R$801.3 million in 2009 from R$718.9 million in 2008. As a percentage of net revenue from sales and services, selling expenses increased to 11.9% in 2009 from 11.3% in 2008.

The increase in selling expenses was primarily due to the following factors:

 an increase of R$72.3 million, or 54.8%, in outsourced services expenses, principally due to (i) R$24.5 million in expenses related to the PURA program in municipal schools, pursuant to our agreement with the city of São Paulo; (ii) an increase of R$19.7 million in outsourced accounts receivable collection services, resulting from an increase in our collection claims; (iii) R$16.4 million in a provision for future expenses that we commit to incur pursuant to our agreement with the city of São Paulo; and (iv) R$8.6 million in verification and billing services, resulting from the outsourcing of these services and the adoption of new technologies in the verification and billing processes;

 an increase of R$32.6 million, or 18.2%, in salaries and related charges, due to (i) annual salary adjustments of 6.69% that came into effect in May 2009; (ii) a R$9.1 million increase in payments under our program to dismiss employees already retired, but that are still working for us, comprising prior notice payments, severance payments and related charges; and (iii) a R$0.9 million increase in the provision for social contributions due to the update of the amount estimated for 2009;

 an increase of R$2.7 million, or 4.4%, in general expenses, due mainly to the increase in fees charged by banks for water billing services; and

 an increase of R$1.4 million, or 23.4%, in data processing equipment due to the updating and modernizing our computer systems.

47 The increase in selling expenses was partially offset by a R$28.1 million decrease in 2009 in the allowance for doubtful accounts in respect of municipalities to which we provide wholesale water supplies.

Administrative Expenses

Administrative expenses increased by R$93.7 million, or 16.2%, to R$672.3 million in 2009 from R$578.6 million in 2008. As a percentage of net revenue from sales and services, administrative expenses increased to 10.0% in 2009 from 9.1% in 2008.

The increase in administrative expenses was primarily due to:

 an increase of R$41.6 million, or 36.9%, in outsourced services, mainly due to (i) R$25.9 million in advertising expenses related to our advertising campaigns that focus on our social and environmental actions, such as Projeto Verão, the Clean Wave Program (Programa Onda Limpa), Soluções Ambientais, and PURA, among others; (ii) R$4.7 million in consulting and other services; and (iii) R$2.2 million in maintenance of information technology, equipment and software licenses;

 an increase of R$20.4 million, or 13.9%, in salaries and related charges, due to (i) annual salary adjustments of 6.69% that came into effect in May 2009; and (ii) a R$6.6 million increase in payments under our program to dismiss employees already retired, but that are still working for us, comprising prior notice payments, severance payments and related charges;

 an increase of R$21.1 million, or 8.5%, in general expenses, consisting of an increase in our provisions for contingencies;

 an increase of R$6.5 million, or 13.3%, in tax expenses, mainly due to (i) a R$3.1 million expense related to the Imposto sobre a Propriedade Predial e Territorial Urbana (“IPTU”) a tax on properties; and (ii) a R$3.2 million expense paid to the ARSESP, the regulatory agency; and

 an increase of R$1.6 million, or 35.6%, in general materials costs, mainly due to property maintenance work.

Other Operating Expenses, Net

Other operating expenses, net, decreased by R$1,013.5 million, or 96.2%, to R$39.5 million in 2009 from R$1,053.0 million in 2008. The decrease was primarily due to: (i) a R$409.1 million provision for losses made in 2008, relating to amounts due from the State of São Paulo with respect to supplemental pension benefits we made on the State’s behalf; and (ii) a provision in the amount of R$535.4 million in 2008 relating to an increase in our estimated future liabilities, calculated on an actuarial basis, for supplemental pension benefits paid by us on behalf of the State under Plan G0 that the State does not believe it is responsible for paying.

Foreign Exchange Gains (Losses), Net

We recorded foreign exchange gain, net of R$395.4 million in 2009 compared to foreign exchange loss, net of R$438.9 million in 2008. The change was primarily due to the 25.5% depreciation of the U.S. dollar against the real in 2009, compared to the 31.9% appreciation of the U.S. dollar against the real in 2008.

Financial Expenses, Net

Financial expenses, net increased by R$330.0 million, or 122.8%, to R$598.7 million in 2009 from R$268.7 million in 2008. As a percentage of net revenues from sales and services, financial expenses, net increased to 8.9% in 2009 from 4.2% in 2008. The increase was principally due to:

 a decrease to R$357.4 million in income from monetary indexation, principally due to a R$344.6 million update of the undisputed amount regarding supplemental pension benefits made in 2008 which

48 did not recur in 2009, pursuant to the third agreement with the State of São Paulo. See “Principal Shareholders and Related Party Transactions—Related Party Transactions—Agreements with the State”;

 an increase of R$66.6 million in other financial expenses, principally due to: (i) adjustment in the interest calculations regarding the Special Program for Payment of Federal and Social Security Related Taxes in Installments (Programa de Parcelamento Especial para Impostos Federais e Previdenciários) (“PAES program”), which had totaled R$58.7 million in 2008; and (ii) financial expenses related to commitments made to the municipalities in order to formalize the concession agreements, amounting to R$15.8 million;

 an increase of R$87.5 million in financial expenses related mainly to interest and monetary indexation of provisions for indemnities; and

 an increase of R$13.5 million, or 8.9%, related to interest on short-term investments.

The increase in financial expenses, net was partially offset by:

 a R$126.6 million decrease in monetary variation on loans and financing, principally due to: (i) a R$105.6 million reduction in monetary variation on loans and financing, resulting from the 1.71% negative variation in the IGP-M in 2009, compared to a 9.81% positive variation in 2008; and (ii) a R$20.9 million reduction in monetary variation on loans and financing, due to the decreased variation of 0.71% in the TR in 2009, compared to a variation of 1.63% in 2008;

 a R$32.4 million reduction in fees and interest payable on our loans and financing denominated in reais, resulting mainly from payments we made and the related decrease in the outstanding balance of our indebtedness; and

 the repayment at maturity of US$98 million principal amount of debt securities in June 2008 with a reduction in interest expense of R$9.9 million.

Income Before Income Tax and Social Contribution

As a result of the factors discussed above, income before income tax and social contribution increased by R$1,476.1 million, or 319.6%, to R$1,937.9 million in 2009 from R$461.8 million in 2008. As a percentage of net revenue from sales and services, our income before income tax and social contribution increased to 28.8% in 2009 from 7.3% in 2008.

Income Tax and Social Contribution

Income tax and social contribution expenses increased by R$165.8 million, or 41.6%, to R$564.0 million in 2009 from R$398.2 million in 2008. This increase was primarily due to the increase of our income before income tax and social contribution in 2009.

Net Income

As a result of the factors discussed above, net income increased by R$1,310.3 million to R$1,373.9 million in 2009 from R$63.6 million in 2008.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Net Revenue from Sales and Services

Net revenue from sales and services increased by R$380.9 million, or 6.4%, to R$6,351.7 million in 2008 from R$5,970.8 million in 2007.

49 Net revenue from sales and services relating to water services increased by R$206.5 million, or 6.1%, to R$3,615.8 million in 2008 from R$3,409.3 million in 2007. This increase was principally due to:

 an average 1.8% increase in the volume of water invoiced in 2008; and

 the effect of the 4.1% tariff increase in September 2007 and the 5.1% tariff increase in September 2008.

Net revenue from sales and services relating to sewage services increased by R$174.4 million, or 6.8%, to R$2,735.9 million in 2008 from R$2,561.5 million in 2007. This increase was principally due to:

 an average 2.4% increase in the volume of sewage services invoiced in 2008; and

 the effect of the 4.1% tariff increase in September 2007 and the 5.1% tariff increase in September 2008.

Cost of Sales and Services

The cost of sales and services increased by R$136.1 million, or 5.0%, to R$2,831.8 million in 2008 from R$2,695.7 million in 2007. As a percentage of net revenue from sales and services, cost of sales and services decreased to 44.6% in 2008 from 45.1% in 2007.

The increase in the costs of sales and services was principally due to the following factors:

 an increase of R$59.9 million, or 15.6%, in outsourced services, mainly due to an increase of (i) R$18.3 million in network maintenance, residential water and sewage connections and street paving related to the loss reduction program; (ii) R$11.5 million in preventive and corrective maintenance of water and sewage treatment stations; (iii) R$5.4 million in transportation of sludge in the water and sewage treatment stations; (iv) R$3.7 million in security services, including the improvement of our long-distance monitoring systems; (v) R$2.5 million in technical services relating to engineering consulting for project development; (vi) R$2.5 million in fees paid to the São Paulo traffic engineering company (Companhia de Engenharia de Tráfego) related to pavement repairs; (vii) R$2.3 million related to the closing and reopening of connections; (viii) R$1.9 million related to the rental of vehicles, which started in 2008, in substitution of our own fleet; and (ix) R$1.8 million due to the termination of our corporate agreement for differentiated mobile phone tariffs;

 an increase of R$57.4 million, or 5.9%, in salaries and related taxes, primarily due to annual salary adjustments of 5.0% that came into effect in May 2008, and, to a lesser extent, a R$7.5 million increase in the provision for pension plan obligations, due to the change in the discount rate used for actuarial calculations, from 8.0% in 2007 to 6.6% in 2008;

 an increase of R$20.8 million, or 18.5%, in materials, mainly resulting from the increase in prices of certain chemical products, which was significantly higher than inflation during the period;

 an increase of R$14.0 million, or 11.5%, in operating and administrative materials, mainly in materials used in distribution and collections network maintenance; and

 an increase of R$5.1 million, or 16.2%, in general expenses, mainly due to payments for the use of the Piracicaba, Capivari and Jundiaí rivers in the total amount of R$3.6 million.

The increase was partially offset by:

 a decrease of R$14.8 million, or 3.1%, in energy costs, principally as a consequence of (i) a review in energy tariffs with an average decrease of 8.4% in the regular energy supply market

50 (mercado cativo), which represents 77.9% of our installed capacity; (ii) a review of agreements for the supply of energy, which amounted to savings of R$2.3 million; and (iii) savings of R$0.5 million resulting from our energy efficiency programs; and

 a decrease of R$6.3 million, or 1.0%, in depreciation and amortization.

Gross Profit

As a result of the factors discussed above, gross profit increased by R$244.8 million, or 7.5%, to R$3,519.9 million in 2008 from R$3,275.1 million in 2007. As a percentage of net revenue from sales and services, gross profit increased to 55.4% in 2008 from 54.9% in 2007.

Selling Expenses

Selling expenses increased by R$79.3 million, or 12.4%, to R$718.9 million in 2008 from R$639.6 million in 2007. As a percentage of net revenue from sales and services, selling expenses increased to 11.3% in 2008 from 10.7% in 2007.

The increase in selling expenses was primarily due to the following factors:

 an increase of R$43.3 million, or 48.9%, in outsourced services expenses, principally due to (i) an increase of R$16.7 million in outsourced accounts receivable collection services; (ii) R$6.7 million in verification and billing services, resulting from the increase in the number of water connections and the adoption of new technologies in the verification and billing processes; (iii) an increase of R$5.4 million related to the PURA program in municipal schools, as per our agreement with the city of São Paulo; and (iv) an increase of R$2.8 million in expenses to minimize fraud on our meters, including inspection visits;

 an increase of R$20.8 million, or 13.2%, in payroll expenses and related charges, primarily due to annual salary adjustments of 5.0% that came into effect in May 2008, and, to a lesser extent, a R$1.5 million increase in the provision for pension plan obligations, due to the change in the discount rate used for actuarial calculations;

 an increase of R$13.0 million, or 4.0%, mainly due to an increase in our allowance for doubtful accounts, which was partially offset by payments received in accordance with certain recovery agreements with municipalities and the return of an escrow deposit related to payments due from the city of Guarulhos; and

 an increase of R$2.2 million, or 3.8%, in general expenses, principally due to the payment of banking fees in respect of our water and sewage billing services.

Administrative Expenses

Administrative expenses increased by R$26.0 million, or 4.7%, to R$578.6 million in 2008 from R$552.6 million in 2007. As a percentage of net revenue from sales and services, administrative expenses decreased to 9.1% in 2008 from 9.3% in 2007.

The increase in administrative expenses was primarily due to:

 an increase of R$46.4 million, or 69.9% in outsourced services, mainly due to (i) R$32.4 million in advertising expenses related to our advertising campaigns that focus on our social and environmental actions, such as the Onda Limpa, PURA and Planeta Sustentável; (ii) R$6.0 million in technical services; (iii) R$2.6 million in investments to minimize fraud in our systems; and (iv) a R$1.9 million increase in software maintenance and upgrading costs to modernize our commercial system;

51  an increase of R$9.8 million, or 7.1%, in payroll expenses and related charges, primarily due to annual salary adjustments of 5.0% that came into effect in May 2008, and, to a lesser extent, a R$1.5 million increase in the provision for pension plan obligations, due to the change in the discount rate used for actuarial calculations;

 an increase of R$5.0 million, or 11.4%, in tax expenses, mainly due to (i) a R$25.3 million increase in the regulation fee payable to the ARSESP; and (ii) a R$2.9 million increase in the financial operations tax (imposto sobre operações financeiras (“IOF”) resulting from the AB loan financing contracted with the IADB in June 2008 (“AB Loan”), offset in part by a R$28.3 million decrease in financial expenses resulting from the termination of the CPMF (Contribuição Provisória sobre a Movimentação ou Transmissão de Valores e de Créditos e Direitos de Natureza Financeira) tax in 2007; and

 an increase of R$8.9 million, or 113.2%, in depreciation and amortization, due to the amortization of certain software systems in 2008, which did not occur in 2007.

The increase in administrative expenses was partially offset by a decrease of R$44.0 million, or 15.1%, in provisions for loss contingencies resulting from the review and reduction in the provisions made in 2007, which did not occur in 2008, resulting from judicial proceedings filed by customers.

Other Operating Expenses, Net

Other operating expenses, net increased by R$1,017.9 million to R$1,053.0 million in 2008 from R$35.1 million in 2007. The increase is primarily due to: (i) an allowance for doubtful accounts related to pension and benefits paid by us on behalf of the State in the amount of R$409.1 million; and (ii) the recognition of a provision for an actuarial liability in the amount of R$535.4 million, corresponding to the contested portion of such liability not reimbursed by the State.

Foreign Exchange Gains (Losses), Net

Foreign exchange gains (losses), net decreased by R$626.9 million, or 333.5%, to a loss of R$438.9 million in 2008, from a gain of R$188.0 million in 2007. The decrease was principally due to a 31.9% appreciation of the U.S. dollar against the real in 2008, which represented an expense of R$436.2 million, compared to the 17.1% depreciation of the U.S. dollar against the real in 2007, which resulted in income of R$188.4 million, resulting in a R$624.6 million net effect caused by the foreign exchange variation.

Financial Expenses, Net

Financial expenses, net decreased by R$480.3 million, or 64.1%, to R$268.7 million in 2008 from R$749.0 million in 2007. As a percentage of net revenue from sales and services, financial expenses, net decreased to 4.2% in 2008 from 12.5% in 2007.

Financial expenses decreased by R$42.0 million, or 4.8%, in 2008, to R$839.4 million in 2008 from R$881.4 million in 2007. The decrease was mainly due to:

 a decrease of R$43.1 million in financial expenses, mainly due to an adjustment in the interest calculations regarding the PAES program, as set forth by Law No. 10,684, dated May 30, 2003, totaling R$65.8 million in 2008. The effect of the PAES adjustments was partially offset by expenses relating to (i) interest and penalty payments in connection with lawsuits, totaling R$13.7 million; (ii) a correction of the interest on shareholders’ equity payable between March 2004 and December 2006, totaling R$3.9 million, as established in our agreement with the State; and (iii) commitments we made to municipalities in order to formalize concession agreements, totaling R$2.6 million;

52  a decrease of R$23.8 million in interest and other charges related to our indebtedness, mainly due to the payments we made and the related decrease in the outstanding balance of our indebtedness; and

 a decrease of R$17.9 million in connection with interest in lawsuits, following the adjustments of the provision for contingencies.

The decrease in financial expenses was partially offset by:

 an increase of R$5.0 million in interest due to the new AB Loan in the amount of R$16.0 million. This increase was partially offset by the repayment of debt securities in June 2008, with a reduction on interest expense of R$11.0 million;

 an increase of R$26.6 million in interest on our indebtedness, principally due to the increase in the applicable indexes. The inflation rate measured by the IGP-M increased from 7.75% in 2007 to 9.81% in 2008. The TR increased from 1.45% in 2007 to 1.63% in 2008. The increases caused an increase in the cost to service our debentures and other loans; and

 an increase of R$12.5 million in monetary index rate variation, mainly due to (i) monetary indexation in connection with lawsuits totaling R$10.2 million; and (ii) monetary indexation on commitments made to municipalities in order to formalize concession agreements, amounting to R$1.6 million.

Financial income increased by R$438.2 million, or 331.0%, from R$132.4 million in 2007 to R$570.6 million in 2008, mainly due to:

 a R$344.6 million update resulting from monetary indexation of the undisputed amount regarding supplemental retirement and pension benefits in accordance with the commitment agreement with the State and the DAEE;

 an increase of R$10.7 million in the interest income on cash and cash equivalents, especially due to the increase in average available balances during 2008; and

 an increase of R$41.4 million in interest and other financial income in connection with customer installment agreements and past due bills paid as a result of our collection efforts.

Income Before Income Tax and Social Contribution

As a result of the factors discussed above, income before income tax and social contribution decreased by R$1,025.1 million, or 68.9%, to R$461.8 million in 2008 from R$1,486.9 million in 2007.

Income Tax and Social Contribution

Income tax and social contribution decreased by R$33.4 million, or 7.7%, to R$398.2 million in 2008 from R$431.6 million in 2007. This decrease was primarily due to a decrease in income before income tax and social contribution, to R$461.8 million in 2008 from R$1,486.9 million in 2007. The tax benefits that resulted from a declaration of interest on shareholders’ equity amounted to R$100.7 million in 2008, compared to R$102.3 million in 2007, based on interest on shareholders’ equity in the amounts of R$296.2 million and R$300.7 million, respectively.

The decrease in income tax and social contribution between 2007 and 2008 was not proportionate with the decrease in income before income tax and social contribution due to permanent differences of R$944.5 million recorded under “Other Operating Expenses, Net” in 2008.

53 Net Income

As a result of the factors discussed above, net income decreased by R$991.7 million, or 94.0%, to R$63.6 million in 2008 from R$1,055.3 million in 2007, mainly related to the recognition of allowance for doubtful accounts from shareholders and provision for actuarial liability amounting to R$409.1 million and R$535.4 million, respectively.

Trend Information

For the remainder of the fiscal year ending December 31, 2010, we expect to benefit from the increased tariff that took effect from September 11, 2010. We are not aware of any material trends other than as disclosed in this offering memorandum that would impact on our results of operations.

Liquidity and Capital Resources

Capital Sources

In order to satisfy our liquidity and capital requirements, we have primarily relied on cash provided by operating activities, borrowings from Brazilian federal and state governmental financial institutions and financing from multilateral organizations and from domestic and international capital markets. As of September 30, 2010, we had R$1,367.2 million of cash and cash equivalents. Outstanding short-term indebtedness was R$1,163.6 million as of September 30, 2010, of which R$137.8 million was denominated in foreign currency. Long-term indebtedness was R$6,496.3 million as of September 30, 2010, of which R$1,577.9 million consisted of foreign currency- denominated obligations. We believe that we have sufficient sources of liquidity and capital to meet our liquidity and capital requirements for the next few years, in light of our current financial position and our expected cash generated by operating activities.

Cash Provided By Operating Activities

Cash provided by operating activities is our single largest source of liquidity and capital resources, and we anticipate that it will continue to be so in the future. Our cash generated by operating activities was R$2,215.6 million, R$2,528.0 million and R$2,061.7 million in 2007, 2008 and 2009, respectively and R$1,624.2 million and R$1,235.2 million for the nine months ended September 30, 2009 and 2010, respectively.

We have overdue accounts receivable from the State and from the municipalities to which we provide water on a wholesale basis. For more information, see “Principal Shareholders and Related Party Transactions— Related Party Transactions”.

Indebtedness Financing

As of September 30, 2010, we had R$6,496.3 million in long-term indebtedness outstanding (excluding the current portion of long-term indebtedness), of which R$1,577.9 million consisted of foreign currency-denominated long-term debt. We had outstanding short-term indebtedness of R$1,163.6 million as of September 30, 2010, representing the current portion of our long-term indebtedness. As of September 30, 2010, R$137.8 million of this short-term indebtedness was denominated in foreign currency. Of our total debt as of September 30, 2010, R$2,500.0 million was secured. As of November 23, 2010, our Standard & Poor’s Ratings Service domestic rating was braAA- and our S&P international rating was BB. As of the same date, our Fitch Ratings domestic rating was A+(bra) and our Fich Ratings international rating was BB.

Various contractual agreements we have entered into, including certain financing agreements with Caixa Econômica Federal and the BNDES, provide for liens over a portion of our cash flows from operations. In addition to Caixa Econômica Federal and the BNDES, we have granted liens over a portion of our cash flows deriving from our operations in connection with agreements relating to securitization transactions, the Alto Tietê PPP and arrangements relating to the lease of certain assets. Pursuant to these agreements, cash received from operations is required to pass through designated accounts. In the event of a default under the relevant agreement, such cash and

54 future cash flows that are required to be deposited in such accounts become restricted and are subject to security interests in favor of the relevant creditor. As of September 30, 2010, a substantial portion of our monthly cash flows from operations was subject to these liens. As of that date, the total amount of our secured debt, including indebtedness benefiting from these liens, was R$2,500.0 million.

The following table sets forth information on our indebtedness outstanding as of September 30, 2010:

As of September 30, 2010 Total Aggregate Principal Final (1) Facility Current Long Term Amount Maturity Interest Rate (in millions of R$) Real-denominated loans and financings: Federal Government/Banco do Brasil ...... 309.2 898.0 1,207.2 2014 8.50% plus UPR Debentures 8th Issue...... 451.3 — 451.3 2011 10.75% plus IGP-M Debentures 9th Issue...... — 228.3 228.3 2015 CDI plus 2.75% (1st series) and 12.87% plus IPCA (2nd series) Debentures 10th Issue...... — 277.3 277.3 2020 TJLP plus 1.92% (1st and 3rd series) and 9.53%, plus IPCA (2nd series) Debentures 11th Issue...... — 1,205.5 1,205.5 2015 CDI plus 1.95% (1st series) and CDI plus 1.4% (2nd series) Debentures 12th Issue...... — 500.0 500.0 2025 TR plus 9.5% Caixa Econômica Federal(2) ...... 87.1 767.9 855.0 2010/2032 6.8% (weighted) plus UPR Promissory notes ...... — 600.0 600.0 2011 CDI plus 0.65% FIDC – SABESP 1 ...... 27.8 — 27.8 2011 CDI plus 0.70% BNDES...... 43.2 51.3 94.5 2013 3% plus TJLP (limited to 6.00%) BNDES (south coast area)...... — 130.5 130.5 2019 2.5% plus TJLP (limited to 6.00%) BNDES (PAC) ...... 0.7 37.3 38.0 2023 2.15% plus TJLP (limited to 6.00%) BNDES (Clean Wave Program) ...... — 217.0 217.0 2025 1.92% plus TJLP (limited to 6.0%) Banco Santander...... 2.3 — 2.3 2010 CDI plus 1.05% Other...... 3.3 5.3 8.6 2011/2018 12.00%, CDI and TJLP plus 6.00% and UPR Accrued interest...... 100.9 — 100.9 1,025.8 4,918.4 5,944.2 Foreign currency denominated loans and financings: IADB ...... 63.7 539.9 603.6 2016/25 3.00% to 4.13% plus monetary adjustment Eurobonds US$140,000 thousand...... — 237.2 237.2 2016 7.50% JICA Yen 21,316,000 thousand...... 11.7 421.0 432.7 2029 1.8% and 2.5% IADB AB Loan Financing US$ 250,000 thousand...... 40.6 379.8 420.4 2023 2.4% to 2.9% Accrued interest...... 21.8 — 21.8 137.8 1,577.9 1,715.7 Total Debt...... 1,163.6 6,496.3 7,659.9

(1) UPR stands for Standard Reference Unit (Unidade Padrão Referência) and is equal to the TR, which was 0.0702% per month as of September 30, 2010; CDI stands for Interbank Deposit Rate (Certificado de Depósitos Interbancários), which was 10.66% per annum as of September 30, 2010; IGP-M was 7.77% per annum as of September 30, 2010; TJLP stands for Long-term Interest Rate (Taxa de Juros a Longo Prazo), published quarterly by the Central Bank, which was 6.00% per annum as of September 30, 2010. (2) This line item represents the aggregate amount outstanding under financing agreements we have entered into with Caixa Econômica Federal, which mature on different dates and bear different interest rates. The numbers above reflect the range of maturities and the weighted average interest rate under these agreements.

55 The following table shows the maturity profile of our debt, as of September 30, 2010, for the periods indicated:

Three months ended December After 31, 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2020 Total (in millions of R$)

Loans and financing...... 219.9 1,717.0 876.6 1,223.9 694.5 596.6 521.4 281.1 241.6 233.4 217.4 836.5 7,659.9

Substantially all of our foreign currency-denominated indebtedness of R$1,282.7 million as of September 30, 2010 was denominated in U.S. dollars or in baskets of foreign currencies. This indebtedness consisted principally of:

 R$609.7 million (US$356.3 million) in U.S. dollar denominated loans from the Inter-American Development Bank (“ IADB”). Under these loans, payments of principal are made in semi-annual installments with final maturity in July 2025. The principal amount is adjusted semi-annually for the variation in a basket of foreign currencies and accrues interest at a rate varying from 3.00% to 4.13%. We have pledged as collateral part of our receivables from our sales and services up to the amount due. For further information on the terms of these loan agreements, see “Business—Capital Expenditure Program—Metropolitan System Investment Program—Tietê Project”;

 R$427.2 million (US$250.0 million) in U.S. dollar denominated loans from the AB Loan financing contracted with the IADB in May 2008. Under this loan, payments of principal are made in annual installments with final maturity in May 2023. The principal amount is adjusted semi-annually for the six month LIBOR plus a spread and accrued interest at a rate varying from 2.4% to 2.9%. This loan was used to repay an outstanding series of debt securities and in connection with the implementation of our investment plan; and

 R$245.7 million (US$140.0 million) in 7.5% notes due 2016.

Our borrowings from multilateral institutions, such as the IADB, have in the past been, and in the future are likely to be, guaranteed by the State or the federal government. We do not pay fees for these guarantees. Under some of the loan agreements with the IADB, we have granted a guarantee (contra garantia) to the federal government. In October 2009, we entered into a loan agreement with the International Bank for Reconstruction and Development (“IBRD”). In September 2010, we executed an agreement with the IADB to finance the third phase of the Tietê Project. The loan amounts to US$600 million, matures on September 3, 2035 and is guaranteed by the federal government for an aggregate principal amount of US$100 million. Amortizations will be made in semiannual installments after a grace period of six years, starting on March 3, 2017. The principal amount accrues interest at the USD Libor. In October 2010, we executed an agreement with JICA to finance the environmental improvement program in the basin of the Billings dam. The loan amounts to ¥6,208 billion and matures on October 20, 2035. Amortizations will be made in semiannual installments after a grace period of seven years, starting on October 20, 2017. The principal amount accrues interest at a rate of 1.2% per year related to civil work and 0.01% per year related to consulting. As of the date of this offering memorandum, no disbursement has been made under these agreements.

In addition, we entered into a credit agreement on August 6, 2004 with the JBIC (today JICA) for the financing of the environmental recovery program for the Baixada Santista metropolitan region, called the Clean Wave Program (Programa Onda Limpa), which was guaranteed by the federal government for an aggregate principal amount of ¥21,316.0 million. The disbursements began in January 2006. As of September 30, 2010, the total amount outstanding was R$433.0 million. Under this financing agreement, amortizations are made in semi-annual installments in August and February, with final maturity in 2029. This obligation is guaranteed by the federal government. For further information on the terms and guarantees of this financing agreement, see “Principal

56 Shareholders and Related Party Transactions—Related Party Transactions—Government Guarantees of Financing” and “Business—Capital Expenditure Program—Regional Systems Investment Program—Clean Wave Program”. In addition, in October 2010, we executed an agreement with JICA to finance the environmental improvement program in the basin of the Billings dam. The loan amounts to ¥6,208 billion and matures on October 20, 2035. Amortizations will be made in semiannual installments after a grace period of seven years, starting on October 20, 2017. The principal amount accrues interest at a rate of 1.2% per year related to civil work and 0.01% per year related to consulting. As of the date of this offering memorandum, no disbursement has been made under this agreement.

Brazilian regulations provide that a state-owned company, such as us, must use the proceeds of “external credit operations” (i.e., foreign currency borrowings, such as the notes offered pursuant to this offering), subject to some exceptions, exclusively to refinance outstanding financial obligations. The use will be restricted according to the declared use of proceeds, and until so used, these proceeds must be deposited as directed by the Central Bank. The deposit requirement does not apply in the case of import financing and financing transactions involving multilateral and official organizations, such as the JICA and the IADB. As of September 30, 2010, there was no restricted cash under this regulation.

Our outstanding domestic debt was R$5,944.2 million as of September 30, 2010 and consisted primarily of real-denominated loans from federal and state-owned banks, in particular, Banco do Brasil S.A., Caixa Econômica Federal and the BNDES, as well as debentures issued in June 2005, October 2008, November 2009, April 2010 and June 2010, and promissory notes issued in August 2010.

The following summarizes our principal borrowings from federal and State-owned banks:

 in March 1994, we entered into a loan agreement with Banco do Brasil S.A. Amortizations of the principal amount are made in 240 successive monthly installments, with final maturity in 2014. The principal amount accrues interest at the daily government interest rate plus 8.50% per annum and monetary adjustment;

 we have entered into several line of credit agreements with Caixa Econômica Federal, pursuant to which amortizations of principal are paid in 180 or 240 months in monthly installments commencing 30 days following the applicable grace period, which varies from 14 to 48 months from the date of signature of the line of credit agreement. The final maturity is 2032. The principal amount accrues interest at a weighted rate of 6.8%. The lines of credit are collateralized by (i) collections of daily billings of water supply and sewage services up to the total amount of the debt, or (ii) by a monthly plan of billings corresponding to the minimum of three times the monthly charge, depending on the terms of the relevant line of credit agreement;

 in August 2002, we entered into a line of credit agreement with the BNDES. The final maturity date is February 2013. The principal amount accrues interest at the long-term rate fixed by the federal government (Taxa de Juros de Longo Prazo) (“TJLP”) but limited to 6.0%, plus 3.0% per annum. If the TJLP exceeds 6.0%, such excess will be added to the principal amount payable at maturity. The line of credit agreement is collateralized by part of the billings from the provision of water and sewage services;

 in November 2007, we entered into a R$129.9 million credit agreement with the BNDES for the financing of the Clean Wave Program. Amortizations of the principal amount will be made in 96 successive monthly installments, with final maturity in 2019. The principal amount accrues interest at the TJLP, but limited to 6.0%, plus 2.50% per annum. If the TJLP exceeds 6.0%, such excess will be added to the principal amount. The credit agreement is collateralized by part of the billings from the provision of water and sewage services;

 in May 2008, we entered into a R$174.0 million financing agreement with the BNDES. Amortizations of the principal amount will be made in 150 successive monthly installments, with final maturity in 2023. The principal amount accrues interest at the TJLP, but limited to 6.0%, plus 2.15% per annum. If

57 the TJLP exceeds 6.0% per annum, such excess will be added to the principal amount. The financing agreement is collateralized by part of the billings from the provision of water and sewage services; and

 in March 2010, we entered into a R$294.3 million financing agreement with the BNDES. Amortizations of the principal amount will be made in 156 successive monthly installments commencing 30 days after the 24-month grace period, with final maturity in 2025. The principal amount accrues interest at the TJLP, but limited to 6.0%, plus 1.92% per annum. If the TJLP exceeds 6.0%, such excess will be added to the principal amount. The financing agreement is collateralized by part of the billings from the provision of water and sewage services.

Amortizations of principal pursuant to our agreements with the BNDES commence following a grace period. The average grace period in connection with our agreements with the BNDES is 36 months.

We are currently negotiating with Caixa Econômica Federal for additional loans to finance portions of our capital expenditure program.

With respect to the debentures issued on September 17, 2004, we filed a securities shelf program with the CVM through which we were able to offer non-convertible debentures in the aggregate principal amount of R$1,500.0 million. We issued the total amount available under this shelf program by July 2005. As part of the program, we issued:

 R$600.0 million in aggregate principal amount of debentures in September 2004 (our sixth issuance), offered in three separate series. The debentures of the first and second series matured in September 2007 and 2009, respectively, and the debentures of the third series matured in September 2010. The debentures of the first series in the aggregate principal amount of R$231.8 million bore interest at the interbank deposit rate (CDI) plus 1.75% per year, and the debentures of the second series in the aggregate principal amount of R$188.3 million, and of the third series, in the aggregate principal amount of R$179.9 million, bore interest at the rate of the IGP-M index plus 11.0% per year;

 R$300.0 million in aggregate principal amount of debentures in March 2005 (our seventh issuance), offered in two series. The debentures of the first and second series matured in March 2009 and 2010, respectively. The debentures of the first series, in the aggregate principal amount of R$200.0 million, bore interest at the interbank deposit rate (CDI) plus 1.5% per year, and the debentures of the second series, in the aggregate principal amount of R$100.0 million, bore interest at the rate of the IGP-M index plus 10.8% per year; and

 R$700.0 million in aggregate principal amount of debentures in June 2005 (our eighth issuance), offered in two series. The debentures of the first series matured in June 2009 and the second series will mature in June 2011. The debentures of the first series, in the aggregate principal amount of R$350.0 million, bore interest at the interbank deposit rate (CDI) plus 1.5% per year, and the debentures of the second series, in the aggregate principal amount of R$350.0 million, bear interest at the rate of IGP-M index plus 10.75% per year.

On October 23, 2008, we filed a securities shelf program with the CVM through which we were able to offer non-convertible debentures in the aggregate principal amount of R$3,000.0 million.

As part of the shelf program with the CVM, we issued R$220.0 million in aggregate principal amount of debentures in October 2008 (our ninth issuance), offered in two series. The debentures of the first and second series will mature in October 2013 and 2015, respectively. The debentures of the first series, in the aggregate principal amount of R$100.0 million, bear interest at the interbank deposit rate (CDI) plus 2.75% per year, and the debentures of the second series, in the aggregate principal amount of R$120.0 million, bear interest at the rate of the IPCA index plus 12.87% per year.

58 We issued in three series our tenth issuance of debentures in aggregate principal amount of R$275.4 million in November 2009. The debentures of the first, second and third series will mature in November 2020. The debentures of the first and third series, in the aggregate principal amount of R$77.1 million and R$115.7 million, respectively, bear interest at 1.92% per year, plus the TJLP. If the TJLP exceeds 6.0%, such excess will be capitalized the 15th day of each month that such debentures are outstanding. The debentures of the second series, in the aggregate principal amount of R$82.6 million, bear interest at the rate of the IPCA index plus 9.53% per year. Our tenth issuance was entirely subscribed by the BNDES. We will use the funds raised from this tenth issuance for investments primarily in the Corporate Program for Water Loss Reduction and on improvements and reforms of the Rio Grande’s water treatment station infrastructure, including other projects for water supply and sewage collection systems in the São Paulo Northern Coast, Paraíba Valley and Mantiqueira Regions.

In December 2009, we issued promissory notes totaling R$900.0 million as a bridge loan, corresponding to an advance of the eleventh issuance of debentures. The promissory notes had a maturity date in 2015 and bore interest at the interbank deposit rate (CDI) plus 3.5% per year. The promissory notes were repaid in full on May 3, 2010.

In April 2010, we issued in two series our eleventh issuance of debentures in aggregate principal amount of R$1,215.0 million. The first and second series will mature in March 2015 and 2013, respectively. The debentures of the first series, in the aggregate principal amount of R$810.0 million, bear interest at the interbank deposit rate (“CDI”), plus 1.95% per year, and the second series, in the aggregate principal amount of R$405.0 million, bear interest at the CDI plus 1.4% per year. The net proceeds from our eleventh issuance of debentures was partially used to redeem the promissory notes issued in December 2009. The rest was used for general corporate purposes.

In June 2010, we issued 500,000 debentures to the Government Severance Indemnity Fund for Employees (Fundo de Garantia por Tempo de Serviço) (“FGTS”), based on the FGTS’s program to finance companies in the sanitation, transport and real estate businesses (our twelfth issuance). The proceeds will be released in three series within a six-month period each, totaling R$500 million in the aggregate, of which R$170 million was already released to us. The debentures will bear interest based on the TR plus 9.5% per year. The debentures will mature in June 2025. The debentures have a grace period of four years in respect of payments, and we have an option to redeem the debentures as from July 2014. We intend to use the proceeds from the twelfth issuance to fund a portion of our capital expenditure program in the water supply and sewage systems.

In August 2010, we issued our fifth promissory notes totaling R$600.0 million as a bridge loan corresponding to an advance of the thirteenth issuance of debentures which will be issued December 2010. The promissory notes mature 180 days from their issue date. The proceeds of this issuance are being used to refinance certain indebtedness maturing in 2010 and 2011.

All of our real-denominated indebtedness is indexed to take into account the effects of inflation. Most of our real-denominated debt provides for inflation-based increases in their respective principal amounts; the increases are determined by reference to the TR plus an agreed margin.

Furthermore, in March 2006, a securitization fund (Fundo de Direitos Creditórios) was created, having our future account receivables as its underlying assets. In March 2006, the fund issued senior and junior quotas to investors in Brazil with a value per unit of R$500.0 thousand. The senior quotas are being amortized in 54 monthly installments, with final maturity in March 2011. The fund is designed to have a return to investors corresponding to 100% of the CDI variation, plus a fixed interest rate of 0.7% per annum. We subscribed, paid for and maintain in a deposit account 26 junior, or subordinated, quotas of this fund in the aggregate principal amount of R$18.2 million. Cash collected in respect of account receivables that have been securitized is retained in the cash collection accounts we maintain at Banco do Brasil S.A. and Caixa Econômica Federal and is transferred directly to the fund to service payments of principal, interest and expenses in respect of the senior quotas of the fund.

In March 2006, the fund advanced proceeds to us derived from the provision of water and sewage services in the aggregate principal amount of R$250.0 million, representing a portion of the payments due under the underlying receivables during a five-year period. We retain the right to receive the balance of additional payments accounting for the remaining portion of the receivables, provided that no event of default under the by-laws of the fund has occurred or is continuing. Once payments to the fund are made in full, which is expected to happen five

59 years after the creation of the fund, we will be entitled to all payments received under the underlying receivables. The fund manager is Caixa Econômica Federal.

Financial Covenants

We are subject to financial covenants under the agreements evidencing or governing our outstanding indebtedness. As of September 30, 2010, we were in compliance with our financial covenants.

With respect to our indebtedness denominated in U.S. dollars or in baskets of foreign currencies, we are subject to financial covenants, including but not limited to those set forth in the loan agreements entered into with the IADB. Each of these agreements contains, among other provisions, limitations on our ability to incur debt. The indenture relating to our 7.5% notes due 2016 is the most stringent of these debt agreements. This indenture prohibits, subject to some exceptions, the incurrence of additional debt in the event that (i) the ratio of Adjusted Total Debt to Adjusted EBITDA (as defined in the related indenture) is greater than 3.65x or (ii) the Debt Service Coverage Ratio (as defined in the indenture) is less than 2.35x. We do not believe that these covenants will impose constraints on our ability to finance our capital expenditure program or, more generally, to develop our business and enhance our financial performance.

In addition, with respect to our outstanding domestic indebtedness, we have entered into a financing agreement with the federal government and Banco do Brasil S.A. and also into several credit agreements with Caixa Econômica Federal, that do not contain material financial covenants. Under our credit agreement with the BNDES, dated November 2007, we are required to keep (i) an EBITDA/net operational income ratio equal to or higher than 38%; (ii) an asset/short-term liability (excluding the short-term portion of long-term liabilities) ratio higher than 1.0x; (iii) total connections (water and sewage)/employees ratio equal to or higher than 520; (iv) EBITDA/debt service equal to or higher than 1.5x; and (v) a shareholders’ equity/total debt ratio equal to or higher than 0.8x. In addition, under our credit agreement with the BNDES, dated May 2008, we are required to keep (i) an EBITDA/net operational income ratio equal to or higher than 38%; (ii) an EBITDA/financial costs ratio equal to or higher than 2.35x; and (iii) net bank debt/EBITDA equal to or higher than 3.2x.

With respect to our outstanding debentures, the eighth, ninth, eleventh and twelfth issuances require us to maintain a current debt ratio (current assets divided by current liabilities, excluding the current portion of long-term indebtedness) higher than 1.0x and an EBITDA/financial expenditures ratio equal to or higher than 1.5x.

The tenth issuance requires us to maintain (i) an EBITDA/net operational revenue ratio equal to or higher than 38 percent; (ii) an EBITDA/financial expenditures ratio equal to or higher than 2.35x; and (iii) a net bank debt/EBITDA ratio equal to or higher than 3.65x.

In addition, our fifth promissory notes require us to maintain an EBITDA/financial expenditures ratio equal to or higher than 1.5x and a net financing and loans/EBITDA ratio equal to or higher than 3.65x.

As a result of our anticipated change in financial reporting due to the convergence of Brazilian GAAP and IFRS beginning with the year ending December 31, 2010, we will be required to calculate the financial and other ratios under our financial covenants based on such revised financial reporting. In anticipation of this change in financial reporting, we calculated these financial and other ratios based on financial information as of and for the year ended December 31, 2009 prepared under IFRS. Our calculations indicated that, based on such financial information, we would not have been in compliance as of December 31, 2009 with the following covenants in our indebtedness with the BNDES (financial ratios in (i), (ii), (iii) and (iv) below) and the Caixa Econômica Federal (financial ratios in (i) and (ii) below):

(i) total revenue/operational costs, debt service and tax expenses, which must be equal to or higher than 114.9%;

(ii) credit balance of accounts receivable x 360/total operational income, which must be equal to or lower than 178;

60 (iii) shareholders’ equity/total debt ratio, which must be equal to or higher than 0.8; and

(iv) EBITDA/net operational income, which must be equal to or higher than 38%.

In addition, our calculation based on financial information as of and for the year ended December 31, 2009 prepared under IFRS indicated that our current debt ratio under our eight, ninth, eleventh and twelfth issuances of debentures would have been 1.03x as of December 31, 2009 (as compared to 1.13x under Brazilian GAAP). Under these debentures, our current debt ratio must be equal to or greater than 1.0x. Under the terms of these debentures, we must fail to satisfy such ratio for two consecutive quarterly periods or for two quarterly periods in any twelve month period in order for a default to occur.

Under the terms of our indebtedness, our failure to meet the financial ratios in (i) and (ii) above would not result in a default under such indebtedness. In relation to these financial ratios, there is no default unless we fail to comply with four of the eight ratios set out in the Performance Improvement Agreement (Acordo de Melhoria de Desempenho), dated May 28, 2007, between the Company and the federal government, with Caixa Econômica Federal signing as an intervening party, that applies to all financing agreements entered into with the Caixa Econômica Federal and to the majority of financing agreements entered into with the BNDES. However, our failure to meet either financial ratio in (iii) and (iv) above alone would result in a default under the terms of such indebtedness and would give rise to an event of default if not cured within 90 days of our receipt of notice of noncompliance from the BNDES.

We have not calculated the above financial ratios based on financial information prepared under IFRS as of any date or for any period subsequent to December 31, 2009, and we cannot assure you that we will be in compliance with the above-referenced covenants or the financial covenants under any of our other indebtedness based on our financial information prepared in accordance with IFRS for the year ending December 31, 2010, once that information is available. We are currently in discussions with the BNDES to modify the specified financial ratios to take into account the impact of the change in financial reporting and expect that the ratios will be modified prior to the availability of our financial statements as of and for the year ended December 31, 2010, which, pursuant to Brazilian regulation, must be published within 90 days of the end of our fiscal year (i.e., prior to March 31, 2011). However, we cannot assure you that we will succeed in entering into such modifications.

Capital Requirements

We have, and expect to continue to have, substantial liquidity and capital resource requirements. These requirements include debt-service obligations, capital expenditures to maintain, improve and expand our water and sewage systems, and dividend payments and other distributions to our shareholders, including the State.

Capital Expenditures

Historically, our capital expenditures have been significantly financed with resources from international and national multilateral agencies and development banks. We generally include in our capital expenditure program for the following year the amount of investment that was not realized in the previous year. In 2009, we invested approximately R$1.8 billion under our capital expenditure program. In the nine months ended September 30, 2010, we invested R$1.4 billion under our capital expenditure program. We have budgeted investments in the amount of approximately R$7.0 billion from 2010 through 2013.

Dividend Distributions

We are required by our by-laws to make dividend distributions, which can be made as payments of interest on shareholders’ equity to our shareholders in an amount equal to or higher than 25% of the amounts available for distribution. We made aggregate distributions of R$300.7 million, R$296.2 million and R$394.2 million in 2007, 2008 and 2009, respectively. We did not make any dividend distributions in the nine months ended September 30, 2010.

61 As of September 30, 2010, we had no dividends payable to the State. We are currently unable to determine the amount, if any, of the remaining portion of these declared dividends that the State will apply to the current and future accounts receivable owed to us by the State or its controlled entities. See “Principal Shareholders and Related Party Transactions—Related Party Transactions—Dividends”.

Market Risk

We are exposed to various market risks, in particular, foreign currency risk and interest rate risk. We are exposed to foreign currency risk because a substantial portion of our financial indebtedness is denominated in foreign currencies, primarily the U.S. dollar, while we generate all of our net operating revenues in reais. Similarly we are subject to interest rate risk based upon changes in interest rates, which affect our net financial expenses. For further information on our market risks, see Note 10 to our consolidated financial statements as of and for the years ended December 31, 2009 and 2008 included elsewhere in this offering memorandum.

Exchange Rate Risk

As of December 31, 2007, 2008 and 2009 and September 30, 2010, R$1,242.3 million, R$2,281.0 million, R$1,746.4 million and R$1,715.7 million, or 21.9%, 33.2%, 26.6% and 22.4%, respectively, of our debt obligations were denominated in foreign currencies (including debt pegged to baskets of foreign currencies). The basket of foreign currency-pegged debt consists primarily of our debt with the IADB. As a result, we are exposed to exchange rate risks that may adversely affect our financial condition and results of operations, as well as our ability to meet debt service obligations.

Exchange Rate Sensitivity We estimate that the potential loss to us in connection with U.S. dollar-denominated debt that would have resulted as of December 31, 2007, 2008, 2009 and September 30, 2010 from each hypothetical instantaneous and unfavorable 1% change in the U.S. dollar against the real would have been approximately R$12.4 million, R$22.8 million, R$17.5 million and R$17.2 million, respectively. Consistent with these estimates, a hypothetical instantaneous and unfavorable 10% change in this exchange rate would have resulted in losses of approximately R$124.2 million, R$228.1 million, R$174.6 million and R$171.6 million as of December 31, 2007, 2008, 2009 and September 30, 2010, respectively. These estimates do not take into account that the changes in exchange rates comprising the baskets of foreign currencies often present variations different from the devaluation of the real in relation to the U.S. dollar. The fluctuation of the real in relation to the U.S. dollar and with the IADB and IBRD basket of currencies, for the years ended December 31, 2007, 2008, 2009 and the nine months ended September 30, 2010 were as follows:

Year ended December 31 Nine months ended September 30 2007 2008 2009 2010 Devaluation (appreciation) of real in relation to: (in percentages) U.S. dollar...... (17.15) 31.9 (25.49) (2.70) IBRD basket of currencies...... n/a n/a n/a n/a IADB basket of currencies...... 4.0 6.1 0.032 3.03

We have not utilized derivative financial instruments, although at times, we enter into forward exchange transactions and financial funding transactions in reais to mitigate foreign currency exposure. As of December 31, 2007, 2008, 2009 and September 30, 2010, we had no forward exchange transactions. As of December 31, 2007, 2008, 2009 and September 30, 2010, we had no short-term indebtedness outstanding, other than the current portion of long-term debt.

Interest Rate Risk

As of December 31, 2007, 2008, 2009 and September 30, 2010, R$2,446.5 million, or 43.0%, R$2,320.0 million, or 33.8%, R$2,193.1 million, or 33.4%, and R$2,582.7 million, or 33.7%, respectively, of our total debt outstanding balance denominated in reais was based on variable rates of interest based on the Reference Standard

62 Unit (Unidade Padrão de Referência) (“UPR”), which is equal to the TR. In addition, as of December 31, 2007, 2008, 2009 and September 30, 2010, R$812.0 million, or 14.3%, R$864.0 million, or 12.6%, R$1,132.4 million, or 17.3%, and R$1,986.2 million, or 25.9%, respectively, of our total debt denominated in reais was subject to interest rates based on the CDI. As of December 31, 2007, 2008, 2009 and September 30, 2010, R$729.8 million, R$973.6 million, R$659.4 million and R$609.7 million, respectively, of our foreign-currency denominated debt was based on the IADB and the IBRD variable rates of interest, which are determined based on the cost of funding of these multilateral organizations in each period.

As of December 31, 2007, 2008, 2009 and September 30, 2010, we did not have any derivative contracts outstanding which limited exposure to changes in the UPR or the CDI or in the IADB or IBRD variable rates. However, we are obliged by law to invest our excess cash with financial institutions controlled by the Brazilian government. We invest these excess funds, which totaled R$392.0 million, R$544.0 million, R$671.1 million and R$1,296.6 million as of December 31, 2007, 2008, 2009 and September 30, 2010, respectively, mainly in short-term instruments. As a result, our exposure to Brazilian interest rate risk is partially limited by our real-denominated floating interest time deposits investments, which generally earn interest based on the CDI. In addition to our exposure with respect to existing indebtedness, we may become exposed to interest rate volatility with respect to indebtedness incurred in the future.

We estimate that we would have suffered a loss over periods of one year, respectively, of up to R$56.9 million, R$68.7 million and R$65.6 million if a hypothetical instantaneous and unfavorable change of 100 basis points in the interest rates applicable to financial liabilities as of December 31, 2007, 2008 and 2009, respectively, had occurred. Similarly, we estimate that we would have suffered a loss over a period of nine months of up to R$76.6 million if a hypothetical instantaneous and unfavorable change of 100 basis points in the interest rates applicable to financial liabilities as of September 30, 2010 had occurred. Consistent with these estimates, a hypothetical instantaneous and unfavorable 100 basis points change in these interest rates would have resulted in losses of approximately R$568.2 million, R$686.5 million, R$656.0 million and R$765.8 million as of December 31, 2007, 2008, 2009 and September 30, 2010, respectively. This sensitivity analysis is based on the assumption of an unfavorable 100 basis point movement of the interest rates applicable to each homogeneous category of financial liabilities and sustained over a period of one year or nine months, as applicable, and that such movement may or may not affect interest rates applicable to any other homogenous category of financial liabilities. A homogeneous category is defined according to the currency in which financial liabilities are denominated and assumes the same interest rate movement within each homogeneous category (e.g., U.S. dollars). As a result, our interest rate risk sensitivity model may overstate the effect of interest rate fluctuation on these financial instruments, as consistently unfavorable movements of all interest rates are unlikely.

The tables below provide information about our interest rate-sensitive instruments. For variable interest rate debt, the rate presented is the weighted average rate calculated as of September 30, 2010. For the foreign currency denominated obligations, these amounts have been converted at the selling rates as of September 30, 2010 and do not represent amounts which may actually be payable with respect to such obligations on the dates indicated.

63 As of September 30, 2010 Average Expected maturity date annual interest 2010 2011 2012 After 2013 Total rate (in millions, except percentages) Assets: Cash equivalents denominated in reais...... 1,367.2 — — — 1,367.2 Total assets...... 1,367.2 — — — 1,367.2

Liabilities: Long term debt: Floating rate, denominated in reais indexed by TR or UPR ...... 111.7 406.3 444.3 1,620.4 2,582.7 8.88% Floating rate, denominated in reais indexed by TJLP...... 14.5 44.6 71.0 546.0 676.1 2.40% Floating rate, denominated in reais indexed by IGPM ...... — 467.1 — — 467.1 8.61% Floating rate, denominated in reais indexed by IPCA ...... 17.4 — — 214.8 232.2 17.03% Floating rate, denominated in reais indexed by CDI ...... 33.7 680.9 234.0 1,037.6 1,986.2 12.22% Floating rate, denominated in U.S. dollars...... 33.5 99.2 99.2 774.2 1,006.1 3.49% Fixed rate, denominated in Yen...... 4.6 11.7 23.3 397.6 437.2 1.54% Fixed rate, denominated in U.S. dollars...... 6.9 4.7 4.7 256.0 272.3 2.67% Total long-term debt ...... 222.3 1,714.5 876.5 4,846.6 7,659.9

The percentage of our indebtedness subject to fixed and floating interest rates is as follows:

As of December 31 As of September 30 2007 2008 2009 2010 Floating rate debt: Denominated in U.S. dollars ...... 12.8% 21.9% 16.1% 13.1% Denominated in reais...... 78.1% 66.8% 73.4% 77.6%

Fixed rate debt: Denominated in Yen ...... 0.7% 5.7% 6.2% 5.7% Denominated in U.S. dollars ...... 8.4% 5.6% 4.3% 3.6% Total 100.00% 100.00% 100.00% 100.00%

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of September 30, 2010.

Tabular Disclosure of Contractual Obligations

Our debt obligations and other contractual obligations as of September 30, 2010 were as follows:

Less than More than 1 year 1-3 years 3-5 years 5 years Total (in millions of R$) Loans and financing...... 1,814.2 2,100.5 1,291.1 2,331.4 7,537.2 Estimated interest payments (1) ...... 122.7 — — — 122,7 Operating and capital lease obligations (2)...... 12.3 71.9 170.0 2,367.7 2,621.9 Alto Tietê PPP ...... 124.6 164.9 86.6 832.8 1,208.9 Pension plan contributions (3) ...... 63.8 143.9 166.5 1,196.1 1,570.3 PAES program (4) ...... 43.8 52.5 — — 96.3 Purchase obligations...... 301.7 98.1 7.9 — 407.7 Total...... 2,483.1 2,631.8 1,722.1 6,728.0 13,565.0

(1) Estimated interest payments on loans and financing were determined considering the interest rates as of September 30, 2010. However, our loans and financing are subject to variable interest indexation and foreign exchange fluctuations, and these estimated interest payments may differ significantly from payments actually made. (2) Includes capital lease obligations which are collateralized by part of the billings from the provision of water and sewage services. (3) Consists of pension plan contributions estimated for the following year. (4) The PAES program, as set forth by Law No. 10,684, dated May 30, 2003.

We believe that we can meet the maturity schedule through a combination of funds generated by operations, the net proceeds of new issuances of debt securities in the Brazilian and international capital markets and

64 additional borrowings from domestic and foreign lenders. Our borrowings are not affected by seasonality. For information concerning the interest rates on our indebtedness outstanding as of September 30, 2010, see Note 10 to our consolidated financial statements as of September 30, 2010 and for the nine months ended September 30, 2010 and 2009 included elsewhere in this offering memorandum.

65 BUSINESS

Our Business

We believe we are one of the largest water and sewage service providers in the world (based on the number of customers in 2009), according to the 11th edition of Pinsent Masons Water Yearbook. We operate water and sewage systems in the State of São Paulo in which the city of São Paulo, Brazil’s largest city, is located. According to the IBGE, the State of São Paulo is Brazil’s most populous state and the state with the highest GDP in Brazil. For the year ended December 31, 2009 and the nine months ended September 30, 2010, we had consolidated net revenue from sales and services of R$6,730.5 million and R$5,357.4 million, respectively, and consolidated net income of R$1,373.9 million and R$1,074.1 million, respectively. For the same periods, we had Adjusted EBITDA of R$2,741.4 million and R$2,439.0 million, respectively, and Adjusted EBITDA margin of 40.7% and 45.5%, respectively. Our total consolidated assets was R$21,565.2 million and R$23,539.7 million and our total shareholders’ equity was R$10,527.6 million and R$11,601.7 million as of December 31, 2009 and September 30, 2010, respectively.

The State, our controlling shareholder, is required by law to own at least 50% plus one of our common shares. As the date of this offering memorandum, the State owns 50.3% of our outstanding common shares. As a mixed capital company, we are an integral part of the State governmental structure. Our strategy and major policy decisions are formulated in conjunction with the State Secretariat for Sanitation and Energy as part of the overall strategic planning for the State. The majority of the members of our board of directors and our board of executive officers are nominated by CODEC, a State agency presided over by the Secretary of the State Treasury (Secretaria da Fazenda) and reporting directly to the State governor.

66 The table below sets forth certain selected financial information as of and for the dates and periods indicated:

(1) Amounts in reais have been translated for convenience only to U.S. dollars at an exchange rate of R$1.6942 per US$1.00, which was the commercial selling rate for U.S. dollars in effect on September 30, 2010, as reported by the Central Bank. (2) For a reconciliation of our Adjusted EBITDA to net income, see “— Selected Financial and Operating Information—Other Financial Information.” (3) Adjusted EBITDA as a percentage of net revenue from sales and services. (4) Loans and financing less cash and cash equivalents. (5) Ratio of net debt to Adjusted EBITDA. (6) Calculated based on Adjusted EBITDA for the twelve months ended September 30, 2009 and 2010.

Our Strengths

We believe that our strong business position and future prospects relate to the following strengths:

● High quality operations. We believe that we adhere to high standards of service and utilize the best available technology in the sanitation business to control the quality of the water captured, produced and distributed. All 16 of our water quality control laboratories operate in accordance with NBR ISO 9001, which follows the highest international standards. Of our 16 laboratories, 15 are accredited by INMETRO, thereby helping to assure the quality and accuracy of our test results, according to NBR/IEC ISO 17.025. Moreover, our laboratories and field teams use the latest equipment to detect substances controlled by

67 regulations and have highly trained personnel to handle contingencies and customer complaints. We believe our technology enhances the efficiency and quality of our operations.

● Strong corporate governance practices. In 2002, we joined the Novo Mercado listing segment of the BM&FBOVESPA, which is the listing segment in Brazil with the highest corporate governance requirements. Our American depositary shares are also listed on the New York Stock Exchange. As a result, we are committed to maintaining certain additional corporate governance practices that are not required by Brazilian law, affording additional protection to our shareholders’ rights and enhancing the quality of information we disclose to the market. On December 1, 2007, we became part of the ISE, which reflects our high degree of commitment to sustainable environmental and social practices.

Our Strategy

● Improve operating efficiency and reduce water losses. We seek to reduce both physical water losses, which result mainly from leakage, and non-physical water losses, which result primarily from the inaccuracy of our water meters installed at our customers’ premises and at our water treatment facilities, and from clandestine and illegal use. In order to achieve more consistent long-term results, we have developed a comprehensive 11-year program to reduce our water loss rate. The first three years of the program from 2009 to 2011 is being funded by the BNDES. During 2012 and 2013 the program will be funded by a loan granted by the government of Japan through JICA. The program’s focus is on the renewal of our water distribution infrastructure and the improvement of maintenance and control services as a means of reducing physical water losses. We are also seeking to reduce physical water losses by creating

68 smaller water supply districts through the construction of DMAs that reduce the system’s pressure and pipe bursts, allowing leaks to be detected and repaired more efficiently. The program also seeks to reduce non- physical water losses by upgrading and replacing inaccurate water meters and through inspections of non- authorized water consumption in water service connections.

● Expand our water and sewage services. We had a sewage coverage ratio of 81.0% as of September 30, 2010, and we plan to increase our sewage coverage ratio to 90.0% by 2018, by adding over 1.6 million sewage connections. In addition, there are municipalities in the State of São Paulo representing an aggregate population of approximately 16.6 million to which we currently do not provide water or sewage services, or to which we currently supply water solely on a wholesale basis. Our strong presence in the State and experience in providing water and sewage services place us in a privileged position to expand our

69 sewage services to municipalities in which we provide only water services and our water and sewage services to municipalities in which we do not yet operate, in both the State of São Paulo and also in other states of Brazil and abroad. Further, we seek to deepen our relationships with strategic clients that consume high volumes of water (more than 500 m3 per month) by applying special tariffs for these clients.

We intend to continue to selectively seek new business opportunities to take advantage of our know-how, size and scale.

State of São Paulo

The State of São Paulo is one of 26 states that, together with the Federal District of Brasília, constitute the Federative Republic of Brazil. The State of São Paulo is located in the southeastern region of the country, which also includes the States of Minas Gerais, Espírito Santo and Rio de Janeiro, and which is, according to IBGE, the most developed and economically active region of Brazil. The State of São Paulo is located on the Atlantic coast of Brazil, with the States of Rio de Janeiro and Minas Gerais to the north, the State of Paraná to the south and the State of Mato Grosso do Sul to the west.

70 The State of São Paulo occupies 3.0% of Brazil’s land mass and encompasses an area amounting to approximately 96,000 square miles. According to the SEADE, the State of São Paulo had an estimated population of 42.8 million as of December 31, 2009. The city of São Paulo, the State of São Paulo’s capital, had an estimated population of 11.0 million, with 20.4 million inhabitants in the São Paulo metropolitan region, as of December 31, 2009. The São Paulo metropolitan region encompasses 39 cities and is the largest metropolitan region in the Americas and the third largest metropolitan region in the world, according to the United Nations’ World Urbanization Prospects, 2009 Revision. The São Paulo metropolitan region accounted for approximately 48.0% of the population of the State of São Paulo as of December 31, 2009.

According to the IBGE, the GDP of the State of São Paulo was approximately R$1,003.0 billion in 2008, representing approximately 33.0% of Brazil’s total GDP, making it the largest economy of any state in Brazil, based on GDP. According to IBGE, the State of São Paulo is also the leading Brazilian state in terms of manufacturing and industrial activity, with a strong position in car manufacturing, pharmaceuticals, computer manufacturing, steel making and plastics, among other activities, as well as a leading position in the banking and financial services industries. The State of São Paulo is the most important exporting state in Brazil, according to the Brazilian Ministry of Development, Industry and Foreign Trade (Ministério do Desenvolvimento, Indústria e Comércio Exterior).

History

Until the end of the nineteenth century, water and sewage services in the State of São Paulo were generally provided by private companies. In 1875, the Province of São Paulo granted a concession for the rendering of water and in 1877 it granted a concession for the rendering of sewage services to Companhia Cantareira de Água e Esgotos. In 1893, the government of the Province of São Paulo assumed responsibility for the rendering of water and sewage services from Companhia Cantareira de Água e Esgotos and formed the Office of Water and Sewers (Repartição de Água e Esgotos), a governmental agency. Since that time, water and sewage services in the São Paulo metropolitan region have been administered by the State government. Historically, water and sewage services in substantially all other municipalities of the State were administered by the municipalities directly either by municipal water and sewage departments or through autarquias of the municipal government. Autarquias are relatively autonomous public bodies with separate legal standing, assets and revenues, created by law to undertake administration of public services, which are considered to be better managed by a decentralized administrative and financial structure.

In 1954, in response to dramatic population growth in the São Paulo metropolitan region, the State government created the Department of Water and Sewers (Departamento de Águas e Esgotos), as an autarquia of the State. The Department of Water and Sewers provided water and sewage services to various municipalities in the São Paulo metropolitan region.

A major restructuring of the entities providing water and sewage services in the State of São Paulo occurred in 1968, with the creation of the Water Company of the São Paulo Metropolitan Region (Companhia Metropolitana de Água de São Paulo) (“COMASP”), the purpose of which was to provide potable water on a wholesale basis for public consumption in the municipalities of the São Paulo metropolitan region. All assets relating to the production of potable water for the São Paulo metropolitan region previously owned by the Department of Water and Sewers were transferred to the COMASP. In 1970, the Superintendency of Water and Sewers of the city of São Paulo (Superintendência de Água e Esgoto da Capital) (“SAEC”) was created by the State government to distribute water and collect sewage in the city of São Paulo. All assets previously owned by the Department of Water and Sewers in connection with the water services were transferred to the SAEC. Also in 1970, the State created the Basic Sanitation Company of the São Paulo Metropolitan Region (Companhia Metropolitana de Saneamento de São Paulo) (“SANESP”) to provide sewage treatment services for the São Paulo metropolitan region. All assets previously owned by the Department of Water and Sewers in connection with the sewage services were transferred to the SANESP. The Department of Water and Sewers was subsequently closed.

On June 29, 1973, the COMASP, the SAEC and the SANESP merged to form our Company with the purpose of implementing the directives of the Brazilian government set forth in the National Water Supply and Sanitation Plan (Plano Nacional de Saneamento). SABESP was incorporated under the laws of Brazil as a limited company (sociedade anônima), for indefinite duration. We are registered at the Commercial Registry of the State of

71 São Paulo (Junta Comercial do Estado de São Paulo) under registration number NIRE 35300016831. The National Water Supply and Sanitation Plan was a program sponsored by the Brazilian government, which financed capital investments in, and assisted in the development of, state-controlled water and sewage companies. Since our formation, other State governmental and State-controlled companies involved in water supply and sewage collection and treatment in the State of São Paulo have been merged into us. As of the date of this offering memorandum, we have outstanding 227,836,623 common shares without par value. All shares have the same voting rights, and all shares are fully paid up.

Corporate Organization

In 2005, we reorganized our corporate management structure. As a result, we currently have six management divisions, each of which is supervised by one of our executive officers.

The allocation of responsibilities among the executive officers is made by our board of directors, after an initial proposal made by the Chief Executive Officer, in accordance with our by-laws. The Chief Executive Officer is responsible for coordinating all management divisions in accordance with the policies and directives established by our board of directors and board of executive officers, including performing the coordination, evaluation and control of all functions related to the Chief Executive Officer’s office and staff, integrated planning, business management and organization, corporate communication, audit, ombudsman and regulatory matters. The Chief Executive Officer represents our Company before third parties and some of its representation powers can be granted to attorneys-in-fact. The executive officers described below report to the Chief Executive Officer:

 the Corporate Management Officer, who is responsible for marketing, human resources and quality control programs, legal affairs, information technology, asset management, legal and procurement, and contracts;  the Chief Financial Officer and Investor Relations Officer, who is responsible for financial planning, raising and allocating financial resources to all divisions within the Company, conducting capital markets and other indebtedness-related transactions and managing indebtedness levels, control department, accounting, corporate governance and investor relations;  the Technology, Enterprises and Environment Officer, who is responsible for the environmental planning and management, technological and operating, product quality control, developments and coordination and execution of special investment programs, projects and new businesses; and  the Chief Operating Officer of the São Paulo Metropolitan Region Division and the Chief Operating Office of the Regional Systems Division, who are responsible for managing the operation, maintenance, execution of planning and works for the water and sewage supply systems including planning and works for our services rendered on a wholesale basis, sales and call center services, as well as the control of economic-financial and operational performance of its division. These Chief Operating Officers are also responsible for sanitation advisory services to autonomous municipalities and for the mediation and the negotiation with communities and local governments, aimed at aligning our interests with the interests of our clients.

In 2007, a change in our by-laws expanded the scope of our corporate purpose to include activities complementary to our water and sewage services, such as urban rainwater management and drainage services, urban cleaning services and solid waste management services. Since then we have established several special purpose companies, as described below:

 On August 15, 2008, we established SESAMM – Serviços de Saneamento de Mogi Mirim S/A (“SESAMM”) a special purpose company, with two companies from the Spanish group Grupo OHL (OHL Medio Ambiente and Técnicas y Gestión Medio-Ambiental S.A.) and the engineering firm ETEP Consultoria, Gerenciamento e Serviços to provide sewage treatment services to the municipality of Mogi Mirim. The company has a period of duration of 30 years from the date that the concession agreement with the municipality of Mogi Mirim was executed. We hold 36.0% of SESAMM’s capital stock, which as of September 30, 2010 amounted to R$10.7 million divided into 10,669,549 common shares with no par value.

72  On October 8, 2009, we established Aquapolo Ambiental S.A., or Aquapolo, a special purpose company with Foz do Brasil S.A., a member of the Odebrecht group, to provide recycled water for the companies comprising the Polo Petroquímico do ABC (petrochemical companies located in the São Paulo metropolitan region). The company has an indefinite term of duration. We hold 49% of Aquapolo’s capital stock, which as of September 30, 2010 amounted to R$1,000 divided into 1,000 common shares with no par value. Aquapolo is scheduled to begin supplying recycled water in April 2012 and is expected to supply up to 1m³ per second of water for petrochemical companies in the São Paulo metropolitan region, with Quattor S.A., controlled by Braskem S.A., as its main client;

 On October 29, 2010, we established Águas de Castilho S.A., a special purpose company, with Companhia de Águas do Brasil – CAB Ambiental, to provide water and sewage services in the municipality of Castilho in the State of São Paulo, and to explore other possible business activities complementary to our business and authorized by our by-laws. The company was established for an indefinite duration. We hold 30% of the shares in Águas de Castilho S.A.’s capital stock, which as of September 30, 2010 amounted to R$65,600.0 divided into 65,600 common shares with no par value.

 On September 15, 2010, we established Águas de Andradina S.A., a special purpose company, with Companhia de Águas do Brasil – CAB Ambiental, to provide water and sewage services in the municipality of Andradina in the State of São Paulo, and to explore other possible business activities complementary to our business and authorized by our by-laws. The company was established for an indefinite duration. We hold 30% of the shares in Águas de Andradina S.A.’s capital stock, which as of September 30, 2010 amounted to R$121,997.0 divided into 121,997 common shares with no par value.

 On June 14, 2010, we established Saneaqua Mairinque S.A., a special purpose company, with Foz do Brasil S.A., to provide water and sewage services in the municipality of Mairinque in the State of São Paulo. The services to be provided comprise the construction, operation and maintenance of the systems for operating and managing the production and distribution of drinking water and the collection, removal, treatment and disposal of sewage, including the administration of management and customer care systems. The company will also explore other possible business activities complementary to our business and authorized by our by-laws. The company was established for an indefinite duration. We hold 30% of the shares in Águas de Saneaqua Mairinque S.A.’s capital stock, which as of September 30, 2010 amounted to R$2,000.0 thousand divided into 2,000,000 common shares with no par value.

Our Operations

We provide water and sewage services to 364 municipalities in the State of São Paulo either under concession agreements, under another form of legal arrangement or without a formal contract. We also supply water services on a wholesale basis to seven municipalities in the State of São Paulo, of which six are located in the São Paulo metropolitan region. Pursuant to article 2 of our by-laws, our corporate purposes include the following activities: water supply and sewage services, urban rain water management and drainage services, urban cleaning services and solid waste management services. In addition, our by-laws authorize us to carry out other related activities, including the planning, operation and maintenance of production systems, the storage, preservation and trading of energy, and the trading of services, products, benefits and rights that, directly or indirectly, result from our assets, projects and activities, and the right to operate a subsidiary anywhere in Brazil or abroad to provide the services mentioned above.

Because of the enactment of the Basic Sanitation Law, which regulates the basic sanitation industry in Brazil, we currently operate under two different contractual environments: (i) for the concession agreements that have already expired, we are currently negotiating or will negotiate a new agreement that follows the terms and conditions of the Basic Sanitation Law, or program agreements; and (ii) for the concession agreements that have not expired, we will continue to operate under the terms and conditions of the previous concession agreements, except in

73 circumstances where the Basic Sanitation Law is applicable even when the concession agreement is still valid. For further information on this topic, see “—Government Regulation— The Basic Sanitation Law” and “—Public Consortia Law and Cooperation Agreement for Joint Management”.

The Basic Sanitation Law requires water and sewage service providers, such as us, to execute a formal agreement by December 31, 2010 with every municipality to which they provide services without a valid legal and binding instrument. See “Risks Factors—Risks Relating to Our Business—We cannot anticipate the effects that further developments of the Basic Sanitation Law and its interpretation will have on the basic sanitation industry in Brazil and on us”.

Concessions

Pursuant to the Brazilian Constitution, the authority to develop public water and sewage systems is shared by the states and municipalities, with the municipalities having primary responsibility for providing water and sewage services to their residents. The Constitution of the State of São Paulo provides that the State shall assure the correct operation, necessary expansion and efficient administration of water and sewage services in the State of São Paulo by a company under its control.

According to the Basic Sanitation Law, existing concessions will remain in effect until payment of indemnification is made based on the valuation of investments. The Basic Sanitation Law provides that our new concession agreements be planned, supervised and regulated by the municipalities together with the State under a new model of associated management that will allow for better control, supervision, transparency and efficiency in the provision of public services.

As of September 30, 2010, we provided water and sewage services to 364 municipalities. Substantially all of these concessions have 30-year terms. Due to court orders, we temporarily suspended our services for five other municipalities (Araçoiaba da Serra, Cajobi, Iperó, Itapira and Tarumã) that accounted for less than 0.1% of our gross revenues. For more information, see “—Legal Proceedings—Concession-Related Legal Proceedings”. Between January 1, 2007 and September 30, 2010, we entered into program agreements with 198 municipalities (including our services agreement with the city of São Paulo) in accordance with the Basic Sanitation Law, of which 24 were entered into during the nine months ended September 30, 2010. In addition to the contracts that have 30-year terms, the municipalities entered into cooperation contracts with the State of São Paulo, delegating the regulation and monitoring of the provision of services to the ARSESP. As of September 30, 2010, 92 concessions had expired, and we have been in negotiation with the municipalities who are parties to these expired concessions to execute program agreements to substitute the expired concessions. From October 1, 2010 through 2030, 51 concession agreements will expire. The remaining municipalities have an undetermined term. Some of the expired concession agreements have been extended for a short term while we negotiate the new contract. Despite the expiration of the concession agreements, we were continuing to provide water and sewage services to all 364 municipalities as of September 30, 2010. We have entered into an agreement with the State and city of São Paulo for the provision of water and sewage services in the city of São Paulo for a 30-year term expiring in June 2040, which in the year ended December 31, 2009 and the nine months ended September 30, 2010, accounted for 55.6% and 54.2% of our gross revenues, respectively.

In February 2006, we created a new division to manage the renewal of expiring concessions. The main responsibility of this division, which reports directly to the Chief Executive Officer, is to renew and thus maintain the existing base of municipalities where we currently operate and formalize contracts under the new model of associated management. Following the increase in the demand for regulatory work, this division has begun to focus on regulatory matters, with its principal activities being centralizing communication with regulatory agencies, driving business to the new regulatory regime and proposing matters in which we have an interest to the ARSESP.

The current concessions are based on a standard form of agreement between us and the relevant municipality. Each agreement received the prior approval of the legislative council of each municipality. The assets comprising the existing municipal water and sewage systems are transferred from the municipality to us. Until 1998, we acquired municipal concessions and the existing water and sewage assets in exchange for our common shares issued at book value. Since 1998, we have acquired concessions and water and sewage assets by paying the

74 municipality an amount equal to the present value of 30 years of estimated cash flows, assuming at least a 12.0% discount factor to us, from the concession being acquired. Payments were made in cash.

The main provisions of the existing concession agreements are as follows:

 we assume all responsibility for providing water and sewage services in the municipality;

 according to the municipal laws authorizing the concession, we can collect tariffs for our services without prior authorization of the municipality. Tariff readjustments follow the guidelines established by the Basic Sanitation Law and the ARSESP;

 as a general rule, to date, we are exempt from municipal taxes, and no royalty is payable to the municipality with respect to the concession;

 we are granted rights of way on municipal property for the installation of water pipes and mains and sewage lines; and

 upon termination of the concession, for any reason, we are required to return the assets comprising the municipality’s water and sewage system to the municipality, and the municipality is required to pay us the non-amortized book value of our assets relating to the concession.

Under the concession agreements executed prior to 1998, the reimbursement for the assets may be through payment of either:

 the book value of the assets; or

 the market value of the assets as determined by a third-party appraiser in accordance with the terms of the specific agreement.

Since 1998, contracts that we have entered into with municipalities for the provision of sanitation services have been regulated by the Federal Concessions Law No. 8,987/1995. Generally, these contracts have a 30-year term, and the total value of the concession is set by the discounted cash flow method. Under this method, when the expected contractual cash flow is reached, the total value of the concession and assets is amortized to zero on our books and we receive no payment for the assets. If the concession is terminated prior to the end of the 30-year term, thereby interrupting the normal contractual cash flow, we are paid an amount equal to the present value of the expected cash flow over the years remaining in the concession, adjusted for inflation.

Federal Law No. 11,107, or the Federal Public Consortia and Cooperation Agreement Law, established the legal basis for the administration of public service contracts, giving municipalities with responsibility for sanitation services greater rights and obligations and setting out more clearly the provision of services and the responsibilities of the parties. New agreements entered into following the expiry of concession agreements under the previous law will follow this new model. See “—Government Regulation—Public Consortia Law and Cooperation Agreement for Joint Management”.

Our new agreement model follows the provisions of the Basic Sanitation Law. The main contractual provisions, among others, are joint execution of responsibilities related to planning, supervision and regulation of services and appointment of regulatory authority of services and periodic disclosure of accounts.

Furthermore, the economic and financial formulas in new agreements must be based on the discounted cash flow methodology and on the revaluation of returnable assets. Pursuant to the Basic Sanitation Law, our own preexisting assets will be returnable assets, but we will carry out all new investments and the municipalities will record them as assets. The municipalities will then transfer possession of these assets to us for our use and management and will also record a credit in the same amount of the assets recorded in our favor. According to Article 42 of the Basic Sanitation Law and the new agreement model, investments made during the contractual period are the property of the applicable municipality, which in turn generates receivables for us that are to be

75 recovered through the operation of the services. These receivables may also be used as guarantees in funding operations.

Another important development was that the new agreement model includes exemptions from municipal taxes applicable on our operational areas and the possibility of the revaluation of our assets that existed prior to the execution of the program agreements in cases involving the early resumption of services by the concession authority.

Municipalities have the inherent power under Brazilian law to terminate concessions prior to their contractual expiration dates for reasons of public interest. For example, the municipalities of Diadema and Mauá, two municipalities we previously served, terminated our concessions in February 1995 and December 1995, respectively. The municipality of Diadema terminated our concession without our consent after asserting that we did not provide adequate water and sewage services, while the municipality of Mauá terminated our concession with our consent. However, we currently serve the municipalities of Diadema and Mauá through the supply of water on a wholesale basis.

We currently do not anticipate that other municipalities will seek to terminate concessions due to our close relationship with municipal governments, recent improvements in the water and sewage services we provide, and the obligation of the municipality to repay us for the return of the concession, as described above. However, we cannot be certain that other municipalities will not seek to terminate their concessions in the future. See “Risk Factors— Risks Relating to Our Business—Municipalities may, under certain circumstances, terminate our concessions before their expiration and the compensation may be inadequate to recover the full value of our investments”.

In addition, there is currently ongoing litigation with respect to municipalities that intend to expropriate our water and sewage systems, or to terminate concession agreements before paying us any indemnification. For a detailed discussion on these proceedings, see “—Legal Proceedings—Concession-Related Legal Proceedings”.

Operations in the City of São Paulo and Certain Metropolitan Regions

As of September 30, 2010, we did not have formal agreements to provide water and sewage services to 22 municipalities in the State of São Paulo, that jointly accounted for 7.7% of our gross revenues in the nine months ended September 30, 2010. We entered into 24 program agreements in the nine months ended September 30, 2010 (including our services agreement with the city of São Paulo), bringing the total number of program agreements entered into since 2007 to 198. These 24 new agreements accounted for 55.5% of our total revenues in the nine months ended September 30, 2010 and 45.4% of our assets as of September 30, 2010. We believe that we have a vested and exclusive right to provide water and sewage services to these municipalities based, in some cases, upon a deed (escritura pública) and also, among other factors, based on our ownership of the water and sewage systems serving these other municipalities and certain succession rights resulting from the merger that formed us.

The Basic Sanitation Law provides that, in case of termination of the relationship with the aforementioned municipalities, the municipalities should pay us an indemnity, in an amount to be appraised, notwithstanding the non-existence of a concession agreement.

On June 23, 2010, the State and the city of São Paulo entered into a convention with the intermediation and consent of SABESP and of the ARSESP pursuant to which they agreed to jointly manage the planning of and investment in the basic sanitation system of the city of São Paulo, among other things. This agreement established that the State and the city of São Paulo would enter into an agreement with us, granting us exclusive rights in the provision of water and sewage services in the city of São Paulo. In addition, the agreement established the role of the ARSESP in regulating and overseeing our activities and established a management committee that will be responsible for planning the water and sewage services and for reviewing our investment plans. The management committee will be composed of six members appointed for renewable two-year terms. The State and the city of São Paulo will have the right to appoint three members each. We are permitted to participate in the meetings of the management committee; however, we are not afforded any voting rights.

76 On June 23, 2010, we entered into a formal agreement with the State and the city of São Paulo to regulate the provision of water and sewage services in the city of São Paulo for a 30-year period, which may be extended for an additional 30-year period. The Municipal Law No. 14,934/2009 authorized the city of São Paulo to enter into an agreement with us. The agreement establishes, among other things, how specific amounts of gross revenues from the services we render should be allocated (after deduction of Cofins and Pasep). Pursuant to the agreement, we are required to (i) invest at least 13.0% of the gross revenues we obtain from this agreement in the improvement of water and sewage infrastructure in the city of São Paulo; and (ii) contribute 7.5% of the gross revenues we obtain from this agreement to the São Paulo Municipal Sanitation Fund. In addition, the agreement provides that the ARSESP, the State agency responsible for regulating the basic sanitation industry, will ensure that the tariffs charged (a) will adequately compensate us for the services we provide and (b) can be adjusted to restore the original balance between each party’s obligation and economic gain (equilíbrio econômico-financeiro). Finally, the agreement envisages the remuneration of the net assets in operation, calculated preferably through asset valuation or by the monetarily updated book value, to be established by the ARSESP. The agreement also foresees the remuneration of the investments to be made by SABESP, such that there will be no residual value at the end of the contract period.

Wholesale Operations

Water Services On a Wholesale Basis

We provide water services on a wholesale basis to seven municipalities (Diadema, Mauá, Santo André, São Caetano do Sul, Guarulhos, Mogi das Cruzes and Sumaré).The agreements to provide water services on a wholesale basis must comply with the Basic Sanitation Law, which regulates the stages of the provision of each service, designating them as interdependent activities whose provision requires the supervision of an independent agency, a specific registration for the activities’ cost and assurance of payment among the several service providers in order to continue the provision of the services, in accordance with the rules to be published by the ARSESP.

In December 2008, we, the State, the city of Diadema and the SANED executed a memorandum of understanding, in which the parties declared their intention to conclude negotiations to liquidate the outstanding debt with us and develop a shared structure of operations between us and the city of Diadema for the operation and provision of water and sewage services. The municipal law authorizing the city of Diadema to enter into an agreement with us was submitted to vote in April 2010. While no definitive date has been scheduled for voting, we expect to reach a final agreement with the city of Diadema and settle all the pending judicial claims in early 2011.

Sewage Services On a Wholesale Basis

We provide sewage services on a wholesale basis to the municipalities of Mogi das Cruzes, Santo André, São Caetano, Mauá and Diadema. The negotiation of the agreement for the provision of sewage services on a wholesale basis with the municipality of Santo André had the intervention of the Public Prosecution Office, and in other municipalities the negotiation of the agreements was a result of our efforts concerning the environment and the awareness of the municipal public authorities regarding to environmental issues. Through these agreements, in 2009 and the nine months ended September 30, 2010, we treated 31.1 million and 21.9 million cubic meters, respectively, of sewage from these municipalities. This is an example of our social-environmental responsibility actions and our commitment to these actions. In 2009 and the nine months ended September 30, 2010, the revenues from these services were approximately R$21.9 million and R$16.5 million, respectively.

In December 2008, we entered into an agreement for the collection and treatment of 20.0% of the sewage generated by the city of Guarulhos. Our total revenue over the five years of the agreement is expected to increase approximately R$58.0 million. In 2011, we expect to finalize the negotiations with the city of Guarulhos for the collection and treatment of the sewage of the central region of the city.

Description of Our Activities

As set forth in Article 2 of our by-laws, our corporate purpose is to render basic sanitation services with the goal of the universalization of basic sanitation in the State of São Paulo without harming our long-term financial

77 sustainability. Our activities comprise water supply, sanitary sewage services, urban rainwater management and drainage services, urban cleaning services, solid waste management services and related activities, including the planning, operation, maintenance and commercialization of energy, and the commercialization of services, products, benefits and rights that directly or indirectly arise from our assets, operations and activities. We are allowed to act in a subsidiary form in other Brazilian locations and abroad. See “—Government Regulation—Public Consortia Law and Cooperation Agreement for Joint Management”.

We set forth below a description of our activities.

Water Operations

Our supply of water to our customers generally involves abstraction of water from various sources, subsequent treatment and distribution to our customers’ premises. In 2009 and the nine months ended September 30, 2010, we produced approximately 2,844.9 million and 2,205.9 million cubic meters of water, respectively. The São Paulo metropolitan region (including the municipalities to which we supply water on a wholesale basis) currently is, and has historically been, our core market, accounting for approximately 71.5% and 71.0 % of water invoiced by volume in 2009 and the nine months ended September 30, 2010, respectively.

The following table sets forth the volume of water that we produced and invoiced for the periods indicated.

Nine months ended Year ended December 31, September 30, 2007 2008 2009 2010 (in millions of cubic meters) Produced São Paulo metropolitan region ...... 2,115.0 2,107.9 2,091.7 1,617.6 Regional systems...... 758.7 744.7 753.2 588.3 Total ...... 2,873.7 2,852.6 2,844.9 2,205.9 Invoiced São Paulo metropolitan region ...... 1,046.8 1,065.9 1,083.9 834.8 Wholesale...... 274.3 284.5 288.0 219.2 Regional systems...... 525.9 529.6 546.1 430.1 Reused water...... 0 0.2 0.8 0.2 Total...... 1,847.0 1,880.2 1,918.8 1,484.3

The difference between the volume of water produced and the volume of water invoiced generally represents both physical and non-physical water losses. See “—Water Losses”. In addition, we do not invoice:

 water discharged for periodic maintenance of water mains and water storage tanks;

 water supplied for municipal uses such as firefighting;

 water consumed in our own facilities; and

 estimated water losses associated with water we supply to favelas (shantytowns).

Generally, the São Paulo metropolitan region experiences higher water demand during the summer and lower water demand during the winter. In the São Paulo metropolitan region, the summer coincides with the rainy season, while the winter corresponds to the dry season. Demand within the Regional systems will vary depending on the area; while the countryside region experiences seasonality in demand similar to the São Paulo metropolitan region, the demand in the coastal region is driven by tourism, with the greatest demand occurring during the Brazilian summer holiday months.

Water Resources

We can abstract water only to the extent permitted by the DAEE and pursuant to authorization contracts entered into with it. Depending on the geographic location of the river basin or if the river crosses more than one

78 state (federal domain), the approval of the National Water Agency (Agência Nacional de Águas) (“ANA”), a federal agency under the Ministry of the Environment, is also required. We currently abstract substantially all of our water supply from rivers and reservoirs, with a small portion being abstracted from groundwater. Our reservoirs are filled by impounding water from rivers and streams, by diverting flow from nearby rivers, or by a combination of these sources.

In order to supply water to the São Paulo metropolitan region, we rely on 20 reservoirs of non-treated water and 192 reservoirs of treated water, which are located in the areas under the influence of the eight water producing systems comprising the interconnected water system of the São Paulo metropolitan region. The capacity of the water sources available for treatment in this area is 71.7 cubic meters per second. Total current capacity is 67.7 cubic meters per second, which can be treated from the interconnected water system of the São Paulo metropolitan region. Average verified production during 2009 and the nine months ended September 30, 2010 on the interconnected water system of the São Paulo metropolitan region was 65.0 and 67.2 cubic meters per second, respectively. The Cantareira, Guarapiranga and Alto Tietê systems, as a whole, supplied approximately 84.0% and 84.1% of the water we produced for the São Paulo metropolitan region in 2009 and the nine months ended September 30, 2010, respectively.

The Cantareira system accounted for 48.2% and 48.5% of the water that we supplied to the São Paulo metropolitan region (including the municipalities to which we supplied water on a wholesale basis) in 2009 and the nine months ended September 30, 2010, respectively. The São Paulo metropolitan region represented 75.6% and 74.6% of our gross revenues in 2009 and the nine months ended September 30, 2010, respectively. The authorization (outorga) for the Cantareira system to use the water in the Piracicaba water basin was renewed on August 6, 2004, for a ten-year period.

With respect to water usage, federal and state agencies are authorized to collect charges from users, such as us, for the abstraction of water from, or dumping of sewage into, bodies of water. Since February 2003, we have been incurring expenses in connection with the use of water from the Paraíba do Sul river basin and, since January 2006, from the Piracicaba, Capivari and Jundiaí river basins. At the end of 2010, we will start to incur expenses in connection with the use of water from the Sorobaca and Médio Tietê river basins. In 2011, we will start to incur expenses in connection with the use of water from the Baixo Tietê, Tietê/Jacaré, Baixada Santista and Alto Tietê river basins, where the São Paulo metropolitan region is located. The ARSESP has so far regulated our tariff structure and adjustments according to the same structure and adjustment formula that we ordinarily follow, which takes into consideration the variation of expenses considered as “non-administrable,” which these expenses fall under. Although we expect to continue to be able to pass on these expenses to our customers, we are uncertain as to when this process will be applied in relation to the various river basins in the State and cannot assure you that we will be able to continue to pass on the cost of all of these charges to our customers. For more information on water usage regulation, see “—Government Regulation—Water Usage”.

The following table sets forth the water production systems from which we produce water for the São Paulo metropolitan region:

System Production Rate(1) (in cubic meters per second) Year ended December 31, Nine months ended 2008 2009 September 30, 2010 Cantareira ...... 30.4 31.3 32.6 Guarapiranga ...... 13.5 13.1 13.0 Alto Tietê...... 11.2 10.3 10.9 Rio Claro ...... 3.6 3.7 3.9 Rio Grande (Billings reservoir) ...... 4.9 4.7 4.8 Alto Cotia...... 1.0 1.0 1.1 Baixo Cotia...... 0.9 0.8 0.8 Ribeirão da Estiva...... 0.1 0.1 0.1 Total...... 65.6 65.0 67.1

(1) Average of the twelve months ended December 31, 2008 and 2009 and the nine months ended September 30, 2010.

79 We own all of the reservoirs in our production systems other than the Guarapiranga and Billings reservoirs and a portion of some of the reservoirs of the Alto Tietê system, which is owned by other companies controlled by the State. We currently do not pay any charges with respect to the use of these reservoirs. In December 2001, we entered into an agreement with the State whereby the State, among other things, agreed to transfer the remaining reservoirs in the Alto Tietê system to us. We accepted, on a temporary basis, the reservoirs in the Alto Tietê System as part of the payment until the State transfers the property rights with respect to the reservoirs to us. We are unable to predict whether and when these reservoirs will be transferred to us because the Public Prosecution Office of the State of São Paulo filed a civil public action alleging that a transfer to us of ownership of the Alto Tietê System reservoirs is illegal.

In January 2009, we began operating, monitoring and maintaining the reservoirs in the Alto Tietê system, formed by the Ponte Nova, Paraitinga, Biritiba, Jundiaí and Taiaçupeba reservoirs. See “—Legal Proceedings— Other Legal Proceedings”.

In the cities of the countryside region, our principal source of water consists of surface water from nearby rivers and from underground water sources. The coastal region is provided with water principally by surface water from rivers and mountain springs.

Statewide, we estimate that we are able to supply nearly all of the demand for water in all of the areas where we operate, subject to droughts and extraordinary climate events. We have been able to meet the demand for water in the São Paulo metropolitan region, primarily as a result of our water conservation program, reductions in water losses and the installation of new water connections. We installed 173,739, 189,473, 200,924 and 141,394 new water connections in 2007, 2008 and 2009 and the nine months ended September 30, 2010, respectively.

The interconnected water system of the São Paulo metropolitan region services 30 municipalities, of which 24 are operated directly by us. We serve the other six municipalities on a wholesale basis, and the distribution is made by other companies or departments related to each municipality.

In order to reach the final customer, the water is stored and transported through a complex and interconnected system. This water system requires permanent operational supervision, engineering inspection, maintenance, quality monitoring and measurement control.

To ensure the continued provision of regular water supply in the São Paulo metropolitan region, we intend to invest R$1.7 billion from 2010 to 2013 to increase our water production and distribution capacities as well as to improve the water supply systems. In 2009 our total investment in water supply systems amounted to R$506.2 million.

Water Treatment

We treat all water at our water treatment facilities prior to placing it into our water distribution network. We operate 213 treatment facilities, of which the eight largest, located in the São Paulo metropolitan region, accounted for approximately 74.0% and 72.0% of all water we produced in 2009 and the nine months ended September 30, 2010, respectively. The type of treatment used depends on the nature of the source and quality of the untreated water. Water abstracted from rivers requires extensive treatment, while water drawn from groundwater sources requires less treatment. All water treated by us also receives fluoridation treatment.

Water Distribution

We distribute water through our own networks of water pipes and mains, ranging in size from 2.5 meters to 100 millimeters in diameter. Storage tanks and pumping stations regulate the volume of water flowing through the networks to maintain adequate pressure and continuous water supply. The following table sets forth the total number of kilometers of water pipes and mains and the number of connections in our network as of the dates indicated.

80 As of December 31, As of August 31, 2007 2008 2009 2010

Water distribution pipes and mains (in kilometers) ...... 62,318 62,582 63,732 64,340(1) Number of connections (in thousands) ...... 6,767 6,945 7,118 7,253

(1) As of August 31, 2010, the most recent date as of which this information is available.

More than 90.0% of the water pipes in our water distribution network are made of cast iron or polyvinylchloride (“PVC”). Distribution pipes at customers’ residences typically are made from high-density polyethylene tubing. Our water mains are mostly made of steel, cast iron or concrete.

As of August 31, 2010, our water distribution pipes and mains included: (i) 32,564 kilometers in the São Paulo metropolitan region; and (ii) 31,776 kilometers in the Regional systems.

As of September 30, 2010, we had 384 storage tanks in the São Paulo metropolitan region with a total capacity of 1.9 million cubic meters, and 1,672 storage tanks in the Regional systems. As of that date, we had 122 treated water pumping stations in the São Paulo metropolitan region aqueduct system, including stations at treatment facilities, intermediate trunk transfer pumping stations and small booster stations serving local areas.

Water mains that require maintenance are cleaned and their lining is replaced. We are typically notified of water main fractures or breaks by the public through a toll-free number maintained by us. We consider the condition of the water pipes and mains in the São Paulo metropolitan region to be adequate as of the date of this offering memorandum. Due to age, external factors such as traffic, the dense population, and commercial and industrial development, water pipes and mains in the São Paulo metropolitan region are somewhat more susceptible to degradation than those in the Regional systems. To counter these effects, we have a maintenance program in place for water pipes and mains that is intended to address anticipated fractures and clogs due to brittleness and encrustation, and to help ensure water quality in the region.

We expect that new customers will be responsible for covering part of the costs of connecting to our water distribution network. Our water connection policy pays for the cost of installation of up to 15 meters of pipe between our distribution network and the point of connection. The customer pays for any further pipe that is necessary for connection. Thereafter, the customer must cover the costs of connecting to the network from the customer’s premises, including costs of purchasing and installing the water meter and related labor costs. Industrial customers are responsible for the entire cost of connection. We perform the installation of the water meter and conduct periodical inspections and measurements. After completion of installation, the customer is responsible for the water meter.

The following table sets forth projected new water connections for the periods indicated.

Year ended December 31, 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010-2018 Forecast (in thousands)

São Paulo metropolitan region.... 92.6 82.8 89.2 88.4 87.9 88.2 85.3 85.5 84.7 784.6 Regional systems...... 65.1 65.9 69.4 70.5 71.4 71.1 69.7 70.2 73.1 626.4 Total...... 157.7 148.7 158.6 158.9 159.3 159.3 155.0 155.7 157.8 1,411.0

Water Losses

The difference between the amount of water supplied and the amount of water invoiced generally represents both physical and non-physical water losses. Water loss percentage represents the quotient of (i) the difference between (a) the total amount of water produced by us less (b) the total amount of water invoiced by us to customers minus (c) the volume of water set out below that we exclude from our calculation of water losses, divided by (ii) the total amount of water produced by us. We exclude the following from our calculation of water losses:

81 (i) water discharged for periodic maintenance of water mains and water storage tanks; (ii) water supplied for municipal uses such as firefighting; (iii) water we consume in our facilities; and (iv) estimated water losses associated with water we supply to favelas (shantytowns).

Since 2005, we have used a method of measuring our water losses based on worldwide market practice for the industry. According to this measurement method, average water losses are calculated by dividing (i) average annual water loss by (ii) the average number of active water connections multiplied by 366. The result of this calculation is the number of liters of water lost per connection per day.

Using this calculation method, for the twelve months ended September 30, 2010, we experienced 482 liters/connection per day of water losses in the São Paulo metropolitan region and 279 liters/connection per day in the Regional systems, averaging 401 liters/connections per day. We plan to reduce water losses to 352 liters/connection per day for the São Paulo metropolitan region and 245 liters/connection per day for the Regional systems, which we expect will result in a total average water loss reduction of 309 liters/connection per day by 2013. In terms of percentage, we intend to reduce water losses from 26.4% to 20.9% in the São Paulo metropolitan region, and from 24.5% to 20.2% in the Regional systems between 2009 and 2013. In each of 2009 and the nine months ended September 30, 2010, we experienced a total water loss of 26.0%, and we expect the water losses to decrease to 20.7% in 2013.

Our strategy to reduce water loss has two approaches:

 reduction in the level of physical losses, which result mainly from leakage, primarily by replacing and repairing water mains and pipes, and installing probing and other equipment, including strategically located pressure-regulating valves; and

 reduction of non-physical losses, which result primarily from the inaccuracy of our water meters installed at our customers’ premises and at our water treatment facilities, and from clandestine and illegal use, by upgrading and replacing inaccurate water meters and expanding our anti-fraud personnel.

We are taking measures to decrease physical losses by reducing response time to fix leakages to less than 24 hours and by better monitoring non-visible water mains fractures. Among other initiatives, we have adopted the following measures to reduce physical water losses:

 the introduction of technically advanced valves to regulate water pressure throughout the water mains in order to maintain the appropriate water pressure to the downstream consumption needs each day. These valves are programmed to respond automatically to variations in demand. During peak usage, the flow of water in the pipes is at its highest point; however, when demand decreases, pressure builds up in the water mains and the resulting stress on the network can cause significant water loss through cracks and an increase in ruptures of the pipes. The technically advanced valves are equipped with probes programmed to feed data to the valve in order to reduce or increase pressure to the water mains as water usage fluctuates. As of September 30, 2010, we had installed 1,720 valves at strategic points in the network, with 1,032 valves being installed in the São Paulo metropolitan region and 688 in the Regional systems;

 the reconfiguration of interconnected water distribution to permit the distribution of water at lower pressure;

 the implementation of routine operational leak detection surveys in high water pressure areas to reduce overall water losses;

 the monitoring of and improved accounting with respect to water connections, especially for large volume customers;

82  regular checking on inactive customers and monitoring non-residential customers that are accounted for as residential customers and, therefore, billed at a lower rate;

 preventing fraud with the use of new, more sophisticated water meters that are more accurate and less prone to tampering;

 installing water meters where none are present; and

 conducting preventive maintenance of existing and newly installed water meters.

Water Quality

We believe that we supply high quality treated water that is consistent with standards set by Brazilian law, which are similar to the standards set in the United States of America and Europe. Pursuant to Brazilian Ministry of Health (Ministério da Saúde) regulations, we have significant statutory obligations regarding the quality of treated water. These laws set certain standards that govern water quality.

In general, the State of São Paulo has excellent water quality from underground or superficial water sources. However, high rates of population growth, increased urbanization and disorganized occupation of some areas of the São Paulo metropolitan region has reduced the quantity and quality of water available to serve the population in the southern area of the São Paulo metropolitan region and in the coastal region. Currently, we successfully treat this water to make it potable. We also work to recover the quality of water of mains and invest in improvements to our treatment systems to ensure the quality and availability of water for the upcoming years.

Water quality is monitored at all stages of the distribution process, including at the water sources, water treatment facilities and on the distribution network. We have 15 regional laboratories, one central laboratory, and laboratories located in all water treatment facilities that monitor water quality, as required by our standards and those set by statute. These laboratories employ approximately 300 technicians, biologists, engineers and chemists. Our laboratories perform an average of 58,802 analyses per month on distributed water, with samples collected from residences. Our central laboratory located in the city of São Paulo is responsible for organic compound analysis using the chromatographic and spectrometric methods, as well as heavy metals analysis by the atomic absorption technique. All of our laboratories have obtained the ISO 9001/2000 and the OHSAS 18001 certification, and 13 of our 16 water control and quality laboratories have obtained the NBR ISO/IEC 17,025 accreditation (accreditation for general requirements for the competence of testing and calibration laboratories) awarded by the National Institute of Metrology, Standardization and Industrial Quality (Instituto Nacional de Metrologia, Normalização e Qualidade Industrial) (“INMETRO”).

All chemical products used for water treatment are analyzed and follow strict specifications set out in recommendations made by the National Health Foundation (Fundação Nacional de Saúde) (“NHF”), the Brazilian Association of Technical Rules (Associação Brasileira de Normas Técnicas) (“ABNT”) and the American Water Works Association (“AWWA”) to eliminate toxic substances that are harmful to human health. From time to time, we face problems with the proliferation of algae, which may cause an unpleasant taste and odor in the water. In order to mitigate this problem, we work on: (i) fighting algae growth at the water source; and (ii) using advanced treatment processes at the water treatment facilities, which involve the use of alternative powdered activated carbon and pre-oxidation processes using potassium permanganate. The algae growth creates significant additional costs for water treatment because of the higher volumes of chemicals used to treat the water. In 2009 and the nine months ended September 30, 2010, we did not detect significant algae growth.

We participate in the New Life Program, which includes a Water Source Program (Programa Mananciais), together with other organizations engaged in the promotion of urban development and social inclusion to mitigate the pollution problem in the São Paulo metropolitan region. In addition, we also participate in the Clean Stream Program to clean up important streams in city of São Paulo. See “—Capital Expenditure Program—New Life” and “—Capital Expenditure Program—Clean Stream Program”.

83 We believe that there are no material instances where our standards are not being met. However, we cannot be certain that future breaches of these standards will not occur.

Fluoridation

As required by Brazilian law, we have adopted a water fluoridation program designed to assist in the prevention of tooth decay among the population. Fluoridation primarily consists of adding fluorosilicic acid to water at 0.7 parts per million. We add fluoride to the water at our treatment facilities prior to its distribution into the water supply network.

Sewage Operations

We are responsible for the collection and removal of sewage through our sewage systems and for its subsequent disposal with or without prior treatment. In each of 2009 and the nine months ended September 30, 2010, we collected approximately 85.0% of all the sewage produced in the municipalities in which we operate in the São Paulo metropolitan region. In addition, in 2009 and the nine months ended September 30, 2010, we collected approximately 72.0% and 73.0%, respectively, of all the sewage produced in the municipalities in which we operate in the Regional systems. During 2009 and the nine months ended September 30, 2010, we accounted for approximately 80.0% and 81.0%, respectively, of all the sewage produced in the municipalities in which we operated in the State of São Paulo. We installed 151,540, 168,882, 184,070 and 170,021 new sewage connections in 2007, 2008 and 2009 and the nine months ended September 30, 2010, respectively.

Sewage System

The purpose of our sewage system is to collect, isolate, treat and adequately dispose of sewage. As of August 31, 2010, we were responsible for the operation and maintenance of 43,405 kilometers of sewage lines, of which approximately 22,465 kilometers are located in the São Paulo metropolitan region and 20,940 kilometers are located in the Regional systems, respectively.

The following table sets forth the total number of kilometers of sewage lines and the total number of sewage connections in our network as of the dates indicated.

As of December 31, As of September 30, 2007 2008 2009 2010

Sewage lines (in kilometers)...... 40,608 41,241 42,895 43,405(1) Sewage connections (in thousands) ...... 5,167 5,336 5,520 5,668

(1) As of August 31, 2010, the most recent date as of which this information is available.

Our sewage system comprises a number of systems built at different times and constructed primarily from clay pipes and, more recently, PVC tubing. Sewage lines larger than 0.5 meters in diameter are primarily made of concrete. Our sewage system is generally designed to operate by gravitational flow, although pumping stations are required in certain parts of the system to ensure the continuous flow of sewage. Where pumping stations are required, we use sewage lines made of cast iron.

The public sewage system operated by us was structured in order to receive industrial sewage and sewage from non-domestic sources for treatment together with domestic sewage. Industrial sewage has physical, chemical and/or biological characteristics that are qualitatively different from household effluents. As a result, the discharge of industrial sewage into the public sewage system is subject to compliance with specific legal demands with the purpose to protect the sewage collection and treatment systems, the health of operators and the environment. The current environmental legislation establishes standards for the discharge of these effluents into the public sewage system. These standards are defined in Article 19A of State Decree 8,468 dated September 8, 1976. To ensure compliance with legislation, periodic audits of the sewage produced by all industrial clients are conducted, and we also request self-monitoring reports from non-domestic sewage-producing sources.

84 The discharge of these effluents into the public sewage system is based on technical and administrative procedures. Before the discharge is permitted, we carry out acceptance studies that assess the capacity of the public sewage system to receive the discharge as well as the compliance with regulations. Upon the conclusion of these studies, the technical and commercial conditions for receiving the discharge are established, which are then formalized in a document signed by us and the effluent producer. Failure to comply with these conditions can lead to the suspension of the connection and notification of the environmental protection agency (Companhia Ambiental do Estado de São Paulo) (“ CETESB”) in order for the applicable measures to be taken. Effluents from our sewage treatment facilities (Estações de Tratamento de Esgotos) (“ETEs”) must comply with effluent limitation guidelines and observe the water quality of the bodies of water established by federal and state legislation. Effluent limitation guidelines consist of a set of parameters that must be verified before the effluents are discharged into a body of water. Quality standards are based on the classification of bodies of water, taking into account the expected use of the water, with these standards becoming more stringent for bodies of water with more important use profiles.

We consider the condition of the sewage lines in the São Paulo metropolitan region to be adequate as of the date of this offering memorandum. Due to greater volume of sewage collected, a higher population and more extensive commercial and industrial development, the sewage lines in the São Paulo metropolitan region are more deteriorated than those of the Regional systems. To counter the effects of deterioration, we maintain an ongoing program for the maintenance of sewage lines intended to address anticipated fractures arising from obstructions caused by system overloads.

Unlike the São Paulo metropolitan region, the countryside region does not generally suffer obstructions caused by sewage system overload. The coastal region, however, experiences obstructions in its sewage lines primarily due to infiltration of sand, especially during the rainy season in the summer months. In addition, the sewage coverage ratio in the coastal region is significantly lower than in the other regions served by us, with approximately 53% of all residences in the coastal region currently connected to our sewage network as of September 30, 2010.

New sewage connections are made on substantially the same basis as connections to water lines: we assume the cost of installation for the first 15 meters of sewage lines from the sewage network to residential and commercial customers’ sewage connections, and the customer is responsible for the remaining costs. Industrial customers are responsible for the entire cost of extension and connection to the sewage network.

The following table sets forth projected new sewage connections for the periods indicated.

Year ended December 31, 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010-2018 Forecast (in thousands) São Paulo metropolitan region...... 69.5 65.1 65.9 72.6 89.6 97.6 116.7 117.4 120.4 814.8 Regional systems...... 155.4 113.8 101.2 81.4 74.3 76.7 71.2 73.8 77.5 825.3 Total...... 224.9 178.9 167.1 154.0 163.9 174.3 187.9 191.2 197.9 1,640.1

Sewage Treatment and Disposal

During the nine months ended September 30, 2010, approximately 71.0% and 85.0% of the sewage we collected in the São Paulo metropolitan region and the Regional systems, respectively, or 75.0% of the sewage we collected in the State of São Paulo, was treated at our treatment facilities and afterwards discharged into receiving water bodies such as inland waters and the Atlantic Ocean, in accordance with applicable legislation. Our sewage treatment facilities have a limited capacity. Flows in excess of this capacity are discharged directly, untreated, to inland waters and the Atlantic Ocean. We currently operate 478 sewage treatment facilities and nine ocean outfalls.

We operate 57 activated sewage treatment facilities. The five largest activated sewage treatment facilities located in the São Paulo metropolitan region have treatment capacity of approximately 18 cubic meters of sewage per second.

85 Sewage treatment in the Regional systems will vary according to the particularities of each area. In the countryside region, treatment consists largely of stabilization ponds where the organic matter is treated and discharged to receiving waters. There are 384 secondary treatment facilities in the countryside region that have treatment capacity of approximately 12.2 cubic meters of sewage per second.

The majority of sewage collected in the coastal region receives treatment and disinfection and is then discharged into rivers and into the Atlantic Ocean. We have 75 sewage treatment facilities in the coastal region.

Our trunk lines are currently not sufficiently extensive to transport all of the sewage collected by us to our treatment facilities. As a result, a portion of the sewage collected by us is released untreated into receiving waters. We are a party to a number of legal proceedings related to environmental matters. See “—Legal Proceedings”. In addition, our capital expenditure program includes projects to increase the amount of sewage that we treat. See “— Capital Expenditure Program” and “—Government Regulation—Sewage Requirements”.

Sludge Disposal

In the São Paulo metropolitan region, the treatment used in the large treatment facilities is activated sludge, where there is a liquid phase and a solid phase which involves the sludge. The activated sludge process was developed in England in 1914. It is widely used for the treatment of household and industrial sewage. The work consists of a system in which a biological mass grows, forms flakes, is continually re-circulated and put in contact with organic matter, always with the presence of oxygen (aerobic). The activated sludge process is strictly biological and aerobic, in which the raw sewage and the activated sludge are intimately mixed, agitated and aerated in units known as secondary decanters where the solid part is separated from the treated wastewater. The settled sludge returns to the aeration tank or is removed for specific treatment.

Sludge removed from the primary and secondary treatment processes typically contains water and a very small proportion of solids. We use filter presses, belt presses and centrifugation machines to abstract the water from the sludge. In 2009 and the nine months ended September 30, 2010, we produced 42,338 and 29,391 tons, respectively, of sludge-dry base, of which 41,184 and 24,487 tons, respectively, were discharged into landfills and the remaining was used for agricultural purposes. In addition, we are testing new technologies for sludge disposal as fertilizer in forest projects, fuel development and concrete manufacturing.

Customers

We currently operate water and sewage systems in 364 of the 645 municipalities in the State of São Paulo. In addition, we currently supply water on a wholesale basis to seven municipalities with an urban population of approximately 3.6 million (Santro André, São Caetano do Sul, Diadema, Mauá, Guarulhos, Sumaré and a portion of Mogi das Cruzes). The following table provides a breakdown of gross revenues from water supply and sewage services by geographic market for the periods indicated.

Nine Months ended Year ended December 31, September 30, 2008 2009 2010 (in millions of R$)

São Paulo metropolitan region...... 5,207.7 5,471.6 4,300.7 Regional systems...... 1,631.1 1,764.6 1,465.9 Total...... 6,838.8 7,236.2 5,766.6

Tariffs

Tariff adjustments follow the guidelines established by the Basic Sanitation Law and the ARSESP. The guidelines also establish procedural steps and the terms for the annual adjustments. The adjustments have to be announced 30 days prior to the effective date of the new tariffs which occur in September, and last for a period of at least 12 months.

86 Tariffs have historically been adjusted once a year and for periods of at least 12 months. We increased our tariffs for water and sewage services by 6.8%, 9.0% and 6.7% in August 2004, 2005 and 2006, respectively. In September 2007, tariffs rose by 4.12%, except for water supply and sewage collection tariffs for consumption of more than 20 cubic meters in non-residential categories, which were adjusted by the cumulative inflation from August 2006 to July 2007 in the consumer price index (Índice Nacional de Preços ao Consumidor Amplo) (“IPCA”) published by IBGE, which came to 3.74%.

With the enactment of the Basic Sanitation Law, an independent regulatory entity is responsible for tariff regulation. The ARSESP has been the independent regulatory entity, regulating tariffs pursuant to a cooperation agreement between each municipality and the State or in locations where the State provides these services directly. With respect to other municipalities where the ARSESP has not been explicitly selected to perform this task, we will depend on legal interpretation to conclude whether the independent entity will be in charge of regulating tariffs. For instance, the municipality of Lins decided to create its own regulatory entity exclusively to regulate tariffs, while transferring its other regulatory powers to the State, to be exercised by the ARSESP. See “—Government Regulation—Tariff Regulation in the State of São Paulo” for additional information regarding our tariffs.

Since 2008, the ARSESP has been developing new concepts that might be included in the tariff structure and adjustment formula, but it has so far regulated our tariff structure and adjustments according to the same structure and adjustment formula that we ordinarily follow.

On July 22, 2009, the ARSESP released a Technical Note (Nota Técnica) regarding the methodology for the tariff adjustment process and submitted it for public comments. On August 12, 2009, the ARSESP informed that the new methodology would not be applied for the 2009 adjustment. The ARSESP is currently working on the development and improvement of its new methodology and it expects to release a revised tariff structure and adjustments formula in 2011.

As of the date of this offering memorandum, the ARSESP applies the adjustment formula for our tariffs that we established on August 29, 2003. This adjustment was developed to better reflect changes in our cost structure. According to this formula, the cost components of the Tariffs Adjustment Index (“IRT”) are separated into two parts (“Part A” and “Part B”), where “Part A” encompasses all costs related to energy, water and sewage treatment materials; federal, state and local taxes; and financial compensation due to use of water resources. “Part B” encompasses all other costs and expenses. “Part B” relates to the difference between the gross operating revenue and the value of “Part A” for the same period. The adjustment of “Part A” is based on the price variation observed in its components during the preceding 12-month period. “Part B” is adjusted by the IPCA index. The adjustment to the formula used by the ARSESP replaced the variable gross operating revenue for the variable cost of reference (“CR”).

In September 2008, we adjusted our tariffs by 5.10% pursuant to ARSESP regulation. In August 2009, the ARSESP approved a 4.43% adjustment for our water and sewage tariffs, starting on September 11, 2009. This adjustment was valid for all municipalities served by us, except for the municipalities of São Bernardo do Campo and Lins, which have different rules. The tariffs in the municipality of São Bernardo do Campo are adjusted pursuant a different methodology due to the difference between the tariffs charged in that municipality when we assumed the service and the tariffs we were charging in the other metropolitan municipalities we serve. The adjustments in São Bernardo do Campo are set so that in September 2012 the tariff charged in this municipality and the tariff charged in the other municipalities of the region will be the same. With respect to the municipality of Lins, our tariff is adjusted in January according to the variation of the IPCA for the last twelve-month period ended November 30.

In August 2010, the ARSESP approved a 4.05% adjustment for our water and sewage tariffs, starting on September 11, 2010. This readjustment does not apply to the municipalities of São Bernardo do Campo, Lins and Magda.

We divide tariffs into two categories: residential and non-residential. The residential category is subdivided into standard residential, residential social and favela (shantytowns). The residential social tariffs apply to residences of low-income families, residences of persons unemployed for up to 12 months and collective living residences. The favela tariffs apply to residences in shantytowns characterized by a lack of urban infrastructure.

87 The latter two sub-categories were instituted to assist lower-income customers by providing lower tariffs for consumption. The non-residential category consists of: (i) commercial, industrial and public customers; (ii) “not-for-profit” entities that pay 50.0% of the prevailing non-residential tariff; (iii) government entities that have entered into a water loss reduction agreement with us and pay 75.0% of the prevailing non-residential tariff; and (iv) public entities that have entered into program agreements with us, for municipalities with a population of up to 30,000 and with half or more classified according to their degree of social vulnerability by the Social Vulnerability Index of São Paulo (Índice Paulista de Vulnerabilidade Social) (“IPVS”) 5 and 6, of the SEADE, obtained through the analysis of the 2000 Census figures, and start to receive tariff benefits, in accordance with our normative ruling, for the category of public use, at the municipality level. The tariffs are equal to those offered to the commercial/entity of social assistance and that corresponds to 50.0% of the public tariffs without contractual provisions referred to in item (iv) above.

We established a new tariff schedule, effective May 2002, for commercial and industrial customers that consume at least 5,000 cubic meters of water per month and that enter into demand agreements with us for at least one-year terms. In October 2007, the minimum volume for the formalization of the agreement declined from 5,000 m³/month to 3,000 m³/month. We believe this tariff schedule will help prevent our commercial and industrial customers from switching to the use of private wells. Since 2008, we have been authorized by the ARSESP to establish tariffs for non-residential customers, such as industrial and commercial customers, that consume more than 3,000 m3/month, with a maximum tariff equal to the tariffs applicable to non-residential customers that consume more than 50 m3/month. In 2010, the ARSESP authorized a reduction in the minimum volume of consumption for customers that enter into demand agreements with us to a minimum of 500 m3/month.

We establish separate tariff schedules for our services in each of the São Paulo metropolitan region and each of the countryside and coastal regions which comprise our Regional systems. Each tariff schedule incorporates regional cross-subsidies, taking into account the customers’ type and volume of consumption. Tariffs paid by customers with high monthly water consumption rates exceed our costs of providing water service. We use the excess tariff billed to high-volume customers to compensate for the lower tariffs paid by low-volume customers. Similarly, tariffs for non-residential customers are established at levels that subsidize residential customers. In addition, the tariffs for the São Paulo metropolitan region generally are higher than tariffs in the countryside and coastal regions.

Sewage charges in each region are fixed and are based on the same volume of water charged. In the São Paulo metropolitan region and the coastal region, the sewage tariffs equal the water tariffs. In the countryside region, sewage tariffs are approximately 20.0% lower than water tariffs. Wholesale water rates are the same for all municipalities served. We also make available sewage treatment services to those municipalities in line with the applicable contracts and tariffs. In addition, various industrial customers pay an additional sewage charge, depending on the characteristics of the sewage they produce.

Each category and class of customer pays tariffs according to the volume of water consumed. The tariff paid by a certain category and class of customer increases progressively according to the increase in the volume of water consumed. The following table sets forth the water and sewage services tariffs by (i) customer category and class and (ii) volume of water consumed charged during the years and period stated, in the São Paulo metropolitan region.

Nine months ended Year ended December 31, September 30, Customer Category Consumption 2007(2) 2008(3) 2009(4) 2010(5) (in R$) Residential: Standard Residential: 0-10(1)...... 1.24 1.31 1.36 1.42 11-20...... 1.94 2.04 2.13 2.22 21-50...... 4.84 5.09 5.32 5.54 Above 50 ...... 5.34 5.61 5.86 6.10 Social: 0-10(1)...... 0.42 0.44 0.46 0.48 11-20...... 0.73 0.77 0.80 0.83 21-30...... 2.57 2.70 2.82 2.93 31-50...... 3.67 3.86 4.03 4.19

88 Nine months ended Year ended December 31, September 30, Customer Category Consumption 2007(2) 2008(3) 2009(4) 2010(5) (in R$) Above 50 ...... 4.05 4.26 4.45 4.63 Favela (shantytown): 0-10(1)...... 0.32 0.34 0.35 0.37 11-20...... 0.36 0.38 0.40 0.42 21-30...... 1.21 1.27 1.33 1.38 31-50...... 3.67 3.86 4.03 4.19 Above 50 ...... 4.05 4.26 4.45 4.63 Non-Residential: Commercial/Industrial/Governmental: 0-10(1)...... 2.49 2.62 2.74 2.85 11-20...... 4.84 5.09 5.32 5.54 21-50...... 9.31 9.78 10.21 10.62 Above 50 ...... 9.69 10.18 10.63 11.06 Social Welfare Entities: 0-10(1)...... 1.24 1.31 1.37 1.42 11-20...... 2.44 2.56 2.67 2.78 21-50...... 4.67 4.91 5.13 5.34 Above 50 ...... 4.83 5.08 5.31 5.53 Government entities that employ the PURA program, with reduction agreement: 0-10(1)...... 1.87 1.97 2.05 2.14 11-20...... 3.63 3.82 3.99 4.15 21-50...... 6.98 7.34 7.67 7.98 Above 50 ...... 7.26 7.63 7.97 8.29 ______(1) The minimum volume charged is for ten cubic meters per month. (2) From September 10, 2007 to September 10, 2008. (3) From September 11, 2008 to September 10, 2009. (4) From September 11, 2009 to September 10, 2010. (5) As from September 11, 2010.

Both in 2009 and the nine months ended September 30, 2010, the average tariff calculated for the Regional systems was approximately 29.0% below the average tariff of the São Paulo metropolitan region.

Billing Procedures

The procedure for billing and payment of our water and sewage services is basically the same for each customer category. Water and sewage bills are based upon water usage determined by monthly water meter readings. Larger customers, however, have their meters read every 15 days to avoid non-physical losses resulting from faulty water meters. Sewage billing is included as part of the water bill and is based on the water meter reading.

We deliver all water and sewage bills by hand to our customers, mainly through independent contractors who are also responsible for reading water meters.

Water and sewage bills can be paid at some banks and other locations in the State of São Paulo. These funds are paid over to us after deducting average banking fees ranging from R$0.29 to R$1.15 per transaction for collection and remittance of these payments.

Customers must pay their water and sewage bills by the due date if they wish to avoid paying a fine. We generally charge a penalty fee and interest on late bill payments. In 2007, 2008, 2009 and the nine months ended September 30, 2010, we received, payment of 92.8%, 97.3%, 94.7% and 96.5%, respectively, of the amount billed to our retail customers, and 92.5%, 94.4%, 93.9% and 96.2%, respectively, of the amount billed to those customers other than State entities, within 30 days after the due date. In 2007, 2008, 2009 and the nine months ended September 30, 2010, we have received 97.9%, 153.1%, 110.1% and 101.9%, respectively, of the amount billed to the State entities. Amounts in excess of 100% reflect our recovery of amounts billed in prior years. With respect to wholesale supply, in 2007, 2008, 2009 and the nine months ended September 30, 2010, we received payment of 65.2%, 64.4%, 68.7% and 58.9%, respectively, of the amount billed within 30 days.

89 In the São Paulo metropolitan region, we monitor water meter readings by use of hand-held computers and transmitters. The system allows the meter reader to input the gauge levels on the meters into the computer and automatically print the bill for the customer. The hand-held computer tracks water consumption usage at each metered location and prepares bills based on actual meter readings. We outsourced this billing system to third-party contractors that employ and train their own personnel whose training we supervise. We have water meter reading and printing by hand-held computers in some municipalities that we serve in the Regional systems and intend to expand this system to other municipalities we serve.

Competition

We believe there are at least two reasons behind a possible increase in our participation in the domestic sanitation market. In the State of São Paulo, there are approximately 275 municipalities that operate their own water and sewage systems and that collectively have a population of approximately 13.0 million, or approximately 31.0% of the population of the State of São Paulo, excluding the population of the municipalities to which we provide water services on a wholesale basis. Given our scale, we are well positioned to capture opportunities in these municipalities. In comparison to the companies providing water and sewage services outside the State of São Paulo, we believe we have technological advantages compared to other water and sewage services providers, which should result in our competitively advantageous position in regions outside the State of São Paulo.

The competition for municipal concessions arises mainly from the municipalities, as they may resume the water and sewage services that were granted to us and start providing these services directly to the local population. In this case, the municipal governments would be required to indemnify us for the unamortized portion of our investment. See “—Our Operations—Concessions”. In the past, municipal governments have terminated our concessions agreements before the expiration date. Furthermore, municipal governments have tried to expropriate our assets in an attempt to resume the provision of water and sewage services to local populations. See “—Legal Proceedings”. We negotiate expired concession agreements and concession agreements that will expire with the municipalities in an attempt to maintain our existing areas of operations. The competition in the State of São Paulo from private water service providers is limited. Only a small number of municipalities have private companies operating water and sewage services.

In recent years, we have also experienced an increasing level of competition in the market for water supply to large customers. Several large industrial customers located in municipalities served by us use their own wells to supply themselves with water. In addition, competition for the disposal of non-residential, commercial and industrial sludge in the São Paulo metropolitan region has increased in recent years as private companies offer stand-alone solutions inside the facilities of their customers. We have also established new tariff schedules for commercial and industrial customers in order to assist us in retaining these customers.

Capital Expenditure Program

Our capital expenditure program is designed to improve and expand our water and sewage system and to increase and protect our water sources in order to meet the growing demand for water and sewage services in the State of São Paulo. Our capital expenditure program has four specific goals in the municipalities we serve: (i) to continue to meet the maximum demand for treated water; (ii) to expand the percentage of households connected to our sewage system; (iii) to increase the treatment of sewage collected; and (iv) to increase operating efficiency and reduce water losses.

From 2000 through 2009, our capital expenditure program totaled R$9.6 billion, primarily to build up our infrastructure and for our efforts to reduce water losses. We have budgeted investments in the amount of approximately R$7.0 billion from 2010 through 2013. We invested R$0.9 billion, R$1.7 billion, R$1.8 billion, R$1.3 billion and R$1.4 billion in 2007, 2008, 2009 and the nine months ended September 30, 2009 and 2010, respectively.

90 The following table sets forth our planned capital expenditures for water and sewage infrastructure for the years indicated.

Planned Capital Expenditures 2010 2011 2012 2013 2010-2013 (in millions of R$)

Water ...... 590 664 653 668 2,575 Sewage ...... 948 835 867 827 3,477 Others ...... 212 254 228 231 925 Total ...... 1,750 1,753 1,748 1,726 6,977

Our capital expenditure program from 2009 through 2013 will continue to focus on achieving our targets by making regular investments in and expanding our infrastructure as well as making investments in the reduction of water losses throughout the 364 municipalities we serve. The following is a description of the main projects in our capital expenditure program.

Metropolitan System Investment Program

Metropolitan Water Program

Demand for our water services has grown steadily over the years in the São Paulo metropolitan region and has exceeded at times the capacity of our water systems. As a result, prior to September 1998, part of our customers in this region received water only on alternate days of the week. We refer to this as “rotation”. In order to remedy this situation, we implemented the Metropolitan Water Program (Programa Metropolitano de Água) to improve regular water supply to the entire São Paulo metropolitan region. This program terminated in 2000 and the rotation was eliminated, but we have maintained our investment projections for the region. During the second phase of the Metropolitan Water Program between 2006 and 2014, we plan to expand the infrastructure of water storage tanks by 210,000 cubic meters and to construct 44 water pumping stations and 240 kilometers of mains. The investment is expected to reach R$2.7 billion and the construction is expected to expand the water production capacity by 13.2 cubic meters per second by 2014. We have been working on this project since 2006, and we expect to complete it by 2014. In 2007, 2008, 2009 and the nine months ended September 30, 2010, we invested R$176.0 million, R$223.0 million, R$327.0 million and R$203.7 million, respectively, in this region. The Alto Tietê Public Private Partnership was the most significant project of the Metropolitan Water Program in 2009.

Alto Tietê Public Private Partnership (PPP)

In June 2008, we entered into a Public Private Partnership (Parceria Público-Privada Alto Tietê) (“PPP”) with Cab Spat, a special purpose company whose main shareholders are Cab Ambiental and Galvão Engenharia S.A. Cab Spat will be responsible for (i) expanding the Taiaçupeba water treatment plant capacity from 10 cubic meters per second to 15 cubic meters per second; (ii) building 17.7 kilometers of water connections and mains; (iii) building four water storage tanks with a total capacity of 70,000 cubic meters; (iv) installing boosters; and (v) building pumping stations. The total investment in projects to be undertaken by Cab Spat during the first two years of the PPP is estimated at R$320.0 million. Cab Spat will also perform maintenance on the dams of the Alto Tietê System, in connection with which Cab Spat will also provide civil engineering, electromechanical and operational services, as well as sludge treatment and the corresponding services regarding water adduction and water supply. The total value of the project is estimated at R$1.0 billion. We intend to pay for these investments over 15 years upon the completion of the contracted projects and services. We initiated the provision of the services on February 1, 2009, and the construction works on February 11, 2009. The capacity of the Taiaçupeba ETE is scheduled to be increased to 2.0m3 per second by the end of 2010, and the works are scheduled to be completed in 2011.

Tietê Project

The Tietê river crosses the São Paulo metropolitan region and receives most of the region’s run-off and wastewater. The environmental status of the river reached a critical level in 1992. In an effort to reverse the situation, the State of São Paulo created a recovery program designed to reduce pollution of the Tietê river by

91 installing sewage collection lines along the banks of the Tietê river and its tributaries. These lines collect raw sewage and deliver it to our sewage treatment facilities. We completed the first phase of the program between 1992 and 1998.

In connection with the first phase of the Tietê Project (Projeto Tietê), in June 1998, we completed the construction of three additional sewage treatment facilities and invested a total of US$1.1 billion, of which US$450.0 million was financed by the IADB, approximately US$100.0 million by Caixa Econômica Federal (“Caixa”) and approximately US$550.0 million by us.

The second phase of the project was carried out from 2000 through 2008, with investments of approximately US$500.0 million, of which US$200.0 million were financed by the IADB, R$60.0 million by the BNDES and R$180.0 million by the BNDES through another financial institution. In this phase, 290,000 sewage connections and more than 1,500 kilometers of sewage collections networks, branch collectors and interceptors were installed and/or built.

The main objective of this second phase was to continue expanding and optimizing the sewage systems of the São Paulo metropolitan region, primarily focusing on actions that allow for the delivery of a higher volume of raw sewage to the sewage treatment facilities that were built in the first phase of the Tietê Project. Upon the conclusion of the second phase of the project in 2008, we were able to collect approximately 5,000 liters of raw sewage per second and send it for treatment in the five sewage treatment plants of our integrated system. As part of the second phase of the Tietê Project, we implemented a geographic information system named SIGNOS. SIGNOS is a management information system which automates and integrates various business processes, including project management, maintenance, operations and customer service and maps out our entire municipal infrastructure in the São Paulo metropolitan region.

The first and second phases of the Tietê Project contributed to an increase from 70.0% to 84.0% in the sewage collection rate and an increase from 24.0% to 70.0% in the treatment of the sewage collected in the São Paulo metropolitan region. As a result, the sewage collection system benefited 15.8 million people (5.1 million more than the number of people served when the Tietê Project was initiated), and the sewage treatment benefited 11.1 million people (8.5 million more than the number of people served when the Tietê Project was initiated).

As of September 30, 2010, we owed US$154.2 million to the IADB for the financing it provided. For further information on the agreement entered into with the IADB, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Sources”. We currently provide secondary treatment to approximately 73.0% of the sewage collected in the São Paulo metropolitan region. The five principal sewage treatment facilities in the São Paulo metropolitan region have an aggregate installed capacity of 18 cubic meters of sewage per second and currently treat an aggregate of 16 cubic meters of sewage per second. We plan to build additional collection lines to direct more raw sewage to our treatment facilities.

The third phase of the Tietê Project, designated as “the decontamination of the Tietê river,” aims at contributing to the recuperation of the water quality of the Tietê river basin through the expansion of the level of collection and treatment of sewage in the São Paulo metropolitan region. The total estimated cost of the third phase is US$1.1 billion, of which US$600 million will be financed pursuant to the IADB Loan entered into on September 3, 2010. The program plan for the third phase comprises mainly (i) drainage collection (collection networks and home connections); (ii) removal and transport of the drainage for treatment (branch collectors and interceptors); and (iii) the construction of sewage treatment plants, not only of the integrated drainage system of the São Paulo metropolitan region, but also of various isolated systems in the same region, during a six-year period from 2010 to 2016. After the third phase of the Tietê Project, the sewage collection system is expected to benefit an additional 1.5 million people and the sewage treatment is expected to benefit an additional 3.0 million people.

Corporate Program for Water Loss Reduction

The objective of the Corporate Program for Water Loss Reduction (Programa Corporativo de Redução de Perdas) is to decrease water losses more efficiently by means of the integration and expansion of the existing initiatives in our business units. We began structuring the program in the second half of 2007 and finalized it in 2008. We anticipate investments of approximately R$3.4 billion throughout the program’s 11-year term, beginning

92 in 2009. The program aims to reduce the incidence of water loss from 436 liters per connection per day in December 2008 to 211 liters per connection per day in 2019, which is equivalent to reducing water losses from 27.7% in December 2008 to 13.0% in 2019. In 2009 and the nine months ended September 30, 2010, we invested approximately R$182.4 million and R$283.6 million, respectively, in this program, and the water losses were reduced to 26.0%, or 401 liters per connection per day, as of September 30, 2010.

New Life

The New Life Program (Programa Vida Nova) includes projects focused on the improvement and preservation of water reserves in the São Paulo metropolitan region and the urban development of the region, especially in the Guarapiranga and Billings mains. The resources will be mostly invested in the creation of infrastructure to collect sewage in the region, and to direct it to treatment plants, while avoiding its pouring directly into springs. The program also includes protection activities in respect of green areas and the urbanization of favelas (shantytowns) and is expected to directly benefit 45,000 families.

The State government, local authorities and the federal government will invest approximately R$1.2 billion in the program. We will fund this program with R$300.0 million. The State Secretariat for Sanitation and Energy coordinates the program with our involvement and that of the Urban Development Company of São Paulo (Companhia de Desenvolvimento Habitacional e Urbano) (“CDHU”) and local governments in the region.

Clean Stream Program

The Clean Stream Program (Programa Córrego Limpo) is a partnership between the State, through us, and the mayor’s office of the city of São Paulo, and aims to clean and recover 100 urban streams in the city of São Paulo, with an investment of R$197.1 million, of which R$143.0 million will be funded by us. The program is expected to benefit 1.8 million people who live in the hydrographic basins of the streams. As of September 30, 2010, 81 urban streams had been decontaminated, benefiting approximately 1.2 million people. The total planned investment is R$118.7 million, of which R$99.3 million will be funded by us.

Regional Systems Investment Programs

We currently have a number of projects in progress and planned for the Regional systems, including projects relating to abstraction of water and collection, removal and final disposal of sewage. We invested R$381.0 million, R$922.0 million, R$1,091.0 million and R$580.0 million in these projects in 2007, 2008, 2009 and the nine months ended September 30, 2010, respectively, and we have budgeted for additional capital expenditures of approximately R$2.4 billion from 2010 through 2013.

Clean Wave Program

The main goals of the Clean Wave Program (Programa Onda Limpa) are to improve and expand the sewage systems in the municipalities comprising the Baixada Santista metropolitan region, increasing the sewage collection rate from 54.0% to 95.0% and treating 100.0% of the collected sewage and thereby improving bathing water quality at 82 beaches in the region. The total investment planned is approximately R$1.5 billion through the end of 2011. On August 6, 2004, we entered into a credit agreement with the Japan Bank for International Cooperation (“JBIC”) for the financing of this project, which was guaranteed by the Federative Republic of Brazil, for a total amount of R$382.8 million. On October 1, 2008, the JICA incorporated the loan transactions of the JBIC. For further information on the agreement entered into with the JICA, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Sources”. In order to fund the remaining R$1,117.2 million, we will seek further financial support from local and international banks and agencies. The first disbursements under this program began in August 2005, and the construction works began in the second quarter of 2007. As of September 30, 2010, we had invested approximately R$1.2 billion in this program, corresponding to 84% of the total works.

93 Northern Coast Clean Wave Program

The Northern Coast Clean Wave Program (Programa Onda Limpa Litoral Norte) will expand the collection and treatment of sewage in the Northern coast of the State of São Paulo, intending to benefit the local population of 600,000 people, as well as 1.3 million tourists each year during the high season. By 2015, the program is expected to increase the collection and treatment of sewage rate in the region from 30.0% to 85.0%, seeking to improve the health and well-being of the population, in addition to stimulating economic development by allowing for an increase in tourism in the region.

In 2008, we inaugurated the Porto Novo sewage treatment plant in the city of Caraguatatuba and began working on the sewage systems projects in the cities of Ilhabela, Ubatuba and Caraguatatuba. These sewage systems were completed in 2010. In February 2009, we began other sewage systems projects in the cities of Caraguatatuba and Ilhabela, which were also completed in 2010.

In 2010, we began working on two other sewage treatment plants in the city of São Sebastião and other sewage system projects in the cities of Ubatuba, Ilhabela and São Sebastião, which we expect to complete in 2012. As of September 30, 2010, the total disbursements for this program reached R$92.0 million.

Coastal Water Program

The Coastal Water Program (Programa Água no Litoral) is the main combination of long-term activities to expand water production capacity in the entire coastal region of the State of São Paulo. More than four million people in coastal cities in the State of São Paulo are expected to benefit from this program. This program will enable us to increase the level of reliability of the systems, eliminating existing and potential deficiencies and irregularities in the water supply. It is also expected to permit us to expand our services to reach universal coverage in the Baixada Santista metropolitan region, increase the availability of treated water to the local population and tourists and improve the quality of water available to the population. We expect to invest R$1.1 billion in the program from 2007 through 2013. The Mambu/Branco Water Production System is part of this program. It will increase water production to supply municipalities in the south of the Baixada Santista, increasing production by 1m3 per second and increasing treatment by 1.6m3 per second. As of September 30, 2010, R$240.2 million had been invested in this program.

Research and Development

Our policy is to invest continually in the modernization of equipment and in the technology needed to identify, evaluate and improve our provision of basic sanitation services while promoting environmental protection and maintaining our competitiveness and profitability. Our research and development activity is divided into committees according to strategy and complexity. In 2007, 2008, 2009 and the nine months ended September 30, 2010, we invested R$3.4 million, R$3.5 million, R$3.8 million and R$2.7 million, respectively, in research and development.

We have also partnered with several research institutions. The most significant partnership is our agreement with the State of São Paulo Research Foundation (Fundação de Amparo à Pesquisa do Estado de São Paulo) (“FAPESP”) to develop and support research projects involving researchers from graduate schools, the State of São Paulo and our employees. This agreement aims to create new technologies to be applied in our business and to develop new technologies related to energy efficiency. We and the FAPESP plan to jointly invest up to R$50 million in this project during a five-year term.

In 2009, we became integrated with the Technology Center of São José dos Campos, which will allow us to share and develop technologies and learn from companies with expertise in research, development and innovation, increasing the possibility of creating technology alliances and entering into new businesses.

In order to further develop our expansion plans, we created a new division for Research, Technology Development and Innovation in May 2010. This new division will be responsible for coordinating studies of technological trends, defining our research projects portfolio and obtaining funding from development agencies.

94 The new division is also expected to enable us to increase the quality of our procedural processes and our technology portfolio, which we offer to the market.

Energy Consumption

Energy is essential to our operations, and as a result we are one of the largest users of energy in the State of São Paulo. In the nine months ended September 30, 2010, we used 1.74% of the total energy consumption in the State of São Paulo. To date, we have not experienced any major disruptions in energy supply. Any significant disruption of energy to us could have a material adverse effect on our business, financial condition, results of operations or prospects. See “Risk Factors—Risks Relating to Our Business—We are exposed to risks associated with the provision of water and sewage services”.

Energy prices have a significant impact on our results of operations. An average increase in energy prices of 17.6% in 2003 negatively affected our results of operations in 2004. In the first nine months of 2010, 44.5% of our total energy consumption occurred within the “free market”, where we can more efficiently negotiate the supply of energy. This energy was provided by Companhia Energética São Paulo (“CESP”) pursuant to a long-term contract expiring in 2012.

Property, Plant and Equipment

Our principal properties consist of reservoirs, water treatment facilities, water distribution networks consisting of water pipes, water mains, water connections and water meters, sewage treatment facilities, and sewage collection networks consisting of sewer lines and sewage connections. As of August 31, 2010, we operated through 64,340 kilometers of water pipes and mains and 43,405 kilometers of sewer lines. As of September 30, 2010, we operated 213 water treatment facilities and 487 sewage treatment facilities, as well as 16 water quality control laboratories.

We own our headquarters building and all other major administrative buildings. We have pledged some of our properties as collateral to the federal government in connection with a long-term financing transaction we have entered into with the IBRD that was guaranteed by the federal government. We have also pledged part of our assets in the amount of R$249.0 million as collateral as of each of December 31, 2009 and September 30, 2010, with respect to our indebtedness under the PAES program.

As of September 30, 2010, the total net book value of our property, plant and equipment and intangible assets (including concession assets) was R$17,981.0 million.

All of our material properties are located in the State of São Paulo.

Environmental Matters

Our environmental policy, which we revised in January 2008, establishes environmental management directives that allow us to become a contributing force to environmental sustainability and excellence. These directives are based on a systematic approach to the environment, which allow us to develop a plan that integrates economic, environmental and social dimensions of our work with sustainable use of natural resources.

In order to coordinate the environmental demands with the specific needs of the different places we operate, we have implemented 20 Environmental Management Centers (Núcleos de Gestão Ambiental) (“NGAs”). The NGAs are closely involved in operational matters, providing decision-making support at a local level and seeking to ensure that environmental guidelines are respected throughout our organization. In this manner, they help contribute to the ongoing improvement of our environmental performance.

Our decentralized business units, which are also responsible for implementing our environmental policy, have developed initiatives and programs related to environmental matters. Since April 2007, we have provided more than 6,500 hours of training in legal and business matters, techniques for evaluating potential environmental

95 damage, environmental licensing and environmental research to our team of professionals working with environmental management issues.

We have the following environmental management programs:

 execution of a program to obtain ISO 14001 certification. Our target remains to obtain such certification for our 65 water and sewage installations by December 2010. We received the certifications for 22 sewage treatment stations (estaçoes de tratamento de esgotos (“ETEs”) in November 2010, which, together with the four ETEs already certified, result in a total of 26 certified ETEs in the São Paulo metropolitan region and in the other regions where we operate in the State of São Paulo. We are planning a new audit of the program for ISO 14001 certifications in December 2010, with the aim of expanding the scope of the program;

 creation of the Corporate Management of Greenhouse Effects Program (Programa Corporativo de Gestão de Emissões de Gases de Efeito Estufa);

 the development of an environmental accounting balance sheet model in order to improve our environmental balance sheet;

 the structuring and implementation of the program for review of our environmental liabilities, fulfillment/execution of the conduct adjustment terms and judicial agreements and for maintaining/obtaining environmental licenses and granting permits for the use of water resources operational facilities;

 structuring of the SABESP Corporate Environmental Education Program (PEA SABESP), including environmental education projects involving the community and other interested persons;

 training of company representatives to participate in the council of the National and State System for the Management of Water Resources (Sistemas Nacional e Estadual de Gerenciamento de Recursos Hídricos), including participation in the process of establishing charges for water usage;

 the development of studies to evaluate water body classifications in order to qualify company representatives to participate in the revision of these classifications;

 specific training programs to train and qualify professionals to participate as technical assistants in legal proceedings relating to environmental matters;

 implementation of the SABESP 3-Rs Program (Programa SABESP 3Rs) for the reduction, re-use and recycling of waste, a program involving the two largest administrative bodies of SABESP with plans to include all other administrative bodies.; and

 the development and implementation of an environmental information system as a tool for environmental management.

In addition to corporate environmental management initiatives, we have launched several projects since 2008 to benefit the environment by engaging the community and third parties with non-governmental organizations, including:

 Oil Recycling Program (Programa de Reciclagem de Óleo de Fritura) (“PROL”);

 Sustainable Planet (Planeta Sustentável);

 One Million Trees in Cantareira (Programa “Um Milhão de Árvores no Cantareira”);

96  Eyes in the Atlantic Rainforest (De Olho na Mata Atlântica);

 Eye on Water (Olho d’Água);

 Program of Lectures on Environmental Management (Ciclos de Conferências de Gestão Ambiental); and

 Supporters of Sustainability (Audiências de Sustentabilidade).

Intellectual Property

Trademarks

We have secured registration of our logo and composite trademark at the Brazilian Institute of Industrial Property (Instituto Nacional da Propriedade Industrial) (“INPI”). We have registered with the INPI the following trademarks: “PROJETO TIETÊ”; “ÁGUA DE REÚSO SABESP”; “REVISTA DAE”; “PURA–PROGRAMA DE USO RACIONAL DA ÁGUA”; “USO RACIONAL DA ÁGUA”, “GOTUCHO”; “GOTA BORRALHEIRA”; “DR. GASTÃO”; and “RATANTAN”. Gotucho, Gota Borralheira, Dr. Gastão and Ratantan are some of the characters from SABESP’s children’s club (Clubinho SABESP), which is a tool for environmental education directed to children through our website.

We have also filed applications with the INPI for registration of the following trademarks: “LICACÃO”; “PARQUE DA INTEGRAÇÃO”; “PROGRAMA DE RECUPERAÇÃO AMBIENTAL”; “PROGRAMA CÓRREGO LIMPO”; “SIGNOS” (Sistema de Informação Geográfica no Saneamento); “SIGNOS NET (SISTEMAS DE INFORMAÇÕES GEOGRAFICAS NO SANEAMENTO”) “SCORPION”; “PROGRAMA ONDA LIMPA”; “PROL PROGRAMA DE RECICLAGEM DO ÓLEO DE FRITURA”; “SABESP SOLUÇÕES AMBIENTAIS”; “AGENTE DA GENTE – SABESP NA COMUNIDADE”; “SABESP INTELIGÊNCIA AMBIENTAL”; “AQUALOG – TECNOLOGIA SABESP”; “EFICAZ”; “ÁGUA DE REÚSO SABESP”; “ÁGUA SABESP AQUÍFERO GUARANI”; “ÁGUA SABESP ESTAÇÃO CANTAREIRA”; “CONTRATO DE FIDELIZAÇÃO SABESP”; “ESGOTOS NÃO DOMÉSTICOS SABESP”; “CLUBINHO SABESP”; and the following characters of the Clubinho SABESP: “SUPER H2O”; “CAUÃ”; “IARA”; “SAYURI”; “CADU”; “DENIS”; and “GABI”.

Patents

We have the following patents granted by the INPI:

 water consumption measurement unit;

 equipment to clean the filters of water treatment facilities;

 equipment for alignment of motor-pump sets; and

 a constructive device in a building hydraulic simulator for didactic purposes.

Software

We have adopted an internal policy that provides for an active and effective audit and prevention of unauthorized software. We have acquired the software licenses for all our workstations.

We have also developed certain computer programs for management and control of water and sewage treatment facilities, as well as for third-party services management, called “AQUALOG”, “SGL” (Bid Management System), “Electronic Price Quotation” (Cotação Eletrônica de Preços), “SCORPION”, “SISDOC – Sistema de Controle de Documentos”, and “SACE – Sistema de Atendimento Comercial Externo”. We have also secured

97 registration of these programs at the INPI and the Brazilian Association of Software Companies (Associação Brasileira de Empresas de Software).

AQUALOG is the only Brazilian software designed to monitor water treatment through the employment of artificial intelligence. In 2001, we completed the first rendering of services based on the AQUALOG software to a third party with the automatization of a water treatment plant in the city of Jaguará do Sul, in the State of Santa Catarina. We have entered into agreements to license the software to Sanesul, in the State of Mato Grosso do Sul, to Teuto’s drug factory in the city of Anapólis, in the State of Goiás, and to a water and sewage station in the city of Aparecida do Norte, in the State of São Paulo.

SGL is an electronic price quotation system that allows us to view and control all bid and acquisition proceedings in real time.

Domain Names

We own the domain names described below and they have been registered with the relevant entity in Brazil, Regristro.br:

 www.sabesp.com.br;

 www.corregolimpo.com.br;

 www.projetotiete.com.br;

 www.revistadae.com.br;

 blogdasabesp.com.br;

 blogsabesp.com.br;

 sustentabilidadesabesp.com.br;

 clubinhosabesp.com.br; and

 superh2o.com.br.

Employees

As of September 30, 2010, we had 15,165 full-time employees. In the nine months ended September 30, 2010, we had an average of 1,035 trainees and 556 apprentices (aprendizes), as defined by federal Law No. 10,097, dated December 19, 2000.

The following table sets forth the number of our full time employees by main category of activity and geographic location as of the dates indicated:

As of December 31, As of September 30, 2007 2008 2009 2010 Total number of employees ...... 16,850 16,649 15,103 15,165 Number of employees by category of activity: Projects and operations...... 11,130 10,932 9,763 9,962 Administration...... 2,794 2,819 2,574 2,520 Finance ...... 564 522 490 476 Marketing ...... 2,362 2,376 2,276 2,207 Number of employees by corporate division: Head office ...... 1,618 1,623 1,541 1,499 São Paulo metropolitan region...... 8,004 7,884 7,055 7,016 Regional Systems ...... 7,228 7,142 6,507 6,650

98 The average tenure of our employees is approximately 17 years. We also outsource certain services such as maintenance, delivery of water and sewage bills, meter reading, catering and security. We believe that our relations with our employees are generally satisfactory.

Approximately 89% of our employees are members of unions. The four main unions that represent our employees are the Sindicato dos Trabalhadores em Água, Esgoto e Meio Ambiente de São Paulo (“SINTAEMA”), the Sindicato dos Trabalhadores da Região Urbana de Santos, São Vicente, Santos metropolitan region, Litoral Sul e Vale do Ribeira (“SINTIUS”), the Sindicato dos Engenheiros do Estado de São Paulo (“SEESP”) and the Sindicato dos Advogados de São Paulo (“SASP”). Our most recent collective bargaining agreements expired on April 30, 2010. We did not reach an agreement with the unions in connection with our latest negotiations of our collective bargaining agreements in 2010. As a result, we applied a provisional salary increase of 5.0%. The unions brought a claim in the labor courts seeking, among other things, a further 1.5% increase in salaries, an increase in the base compensation over which the annual profit sharing is calculated and a 100.0% increase in overtime pay. The court of first instance ruled in favor of the unions, and we have filed an appeal seeking to reverse the court’s decision. As of the date of this offering memorandum, a final decision has not been rendered. Any unfavorable decision by the court would result in an increase in our personnel expenses.

We have experienced the following strikes in the last five years, none of which interrupted the essential services that we provide: a two-day strike in June 2005, a one-day strike in May 2006, a four-day strike in June 2008, a three-day strike in May 2009 and an eight-day strike in May 2010. Under Brazilian law, our non administrative employees are considered “essential employees” and, therefore, are limited in their right to strike.

Profit Sharing and Pension Plans

We have established a pension and benefits fund, Plan G1, which is operated and administered by SABESPREV—Fundação SABESP de Seguridade Social, to provide our employees with retirement and pension benefits. This pension plan provides defined-benefit payments to former employees and their families. Both we and our employees make contributions to the pension plan. We are also required to pay supplemental pension payments relating to the employment contracts of certain employees entered into prior to the creation of Plan G1. Our total contributions to the pension plan were R$11.9 million, R$12.5 million, R$12.9 million and R$10.9 million in 2007, 2008, 2009 and the nine months ended September 30, 2010, respectively. As of September 30, 2010, our obligation under these plans totaled R$506.7 million. For further information on our pension plans, see Note 13 to each of our consolidated financial statements as of December 31, 2009 and 2008 and our consolidated financial statements as of September 30, 2010 and for the nine months ended September 30, 2010 and 2009, included elsewhere in this offering memorandum.

On April 14, 2000, the State issued Decree No. 44,836, which allows for the payment of profit-sharing amounts on an exceptional basis, provided that specific authorizations are obtained by us from the Wages Policy Commission (Comissão de Política Salarial). We have obtained this authorization every year since 2000 and, therefore, paid profit-sharing amounts to our employees during this period.

The profit-sharing plan evaluates the business performance from an economic-financial, operating and administrative stand-point. Beginning in 2008, payments under the profit-sharing plan have been based both on general goals that evaluate us as a whole and on other goals that evaluate the performance of our different business units. Payments are proportionally reduced annually if the goals are not completely achieved.

We recorded profit-sharing expenses of R$51.3 million, R$53.2 million, R$53.4 million, R$14.2 million and R$11.8 million in 2007, 2008, 2009 and the nine months ended September 30, 2009 and 2010, respectively. We believe that the profit-sharing plan has, in the past, contributed to increased employee productivity. We do not have a stock-option plan for our employees.

99 Insurance

We maintain insurance covering, among other things, fire or other damage to our property and office buildings and third-party liability. We also maintain insurance coverage for directors’ and officers’ liability (D&O insurance). We currently obtain our insurance policies by means of public bids involving major Brazilian and international insurance companies. During the nine months ended September 30, 2010, we paid a total aggregate amount of R$5.8 million in premiums, covering approximately R$1,877.5 million of assets, third-party liabilities and D&O insurance. We do not have insurance coverage for business interruption risk because we do not believe that the high premiums for such insurance are justified by the low risk of major interruption. In addition, we do not have insurance coverage for liabilities arising from water contamination or other problems involving our water supply to customers and for environmental related liabilities and damages. We believe that we maintain insurance at levels customary in Brazil for our type of business.

Legal Proceedings

In the ordinary course of our business, we are a party to judicial and administrative proceedings relating to civil, environmental, labor and tax matters. As of September 30, 2010, we estimated that these legal proceedings totaled approximately R$3,657.0 million (excluding the amount of R$117.5 million related to court deposits). This amount was based on probable and possible losses and on the value attributed to the lawsuit by the plaintiffs in some cases and on the economic value of the lawsuits in others. Out of the total amount of contingencies as of September 30, 2010, approximately R$1,460.1 million relate to tariff-related legal proceedings and consumers claims, approximately R$934.7 million relate to contractors’ claims, approximately R$404.7 million relate to tax proceedings, approximately R$274.4 million relate to labor proceedings, approximately R$155.3 million relate to civil public actions related to environmental matters and approximately R$427.8 million relate to other civil matters. As of September 30, 2010, the provision for legal contingencies totaled R$1,402.1 million (excluding the amount of R$106.1 million related to court deposits), of which R$630.4 million relate to tariff-related legal proceedings and consumers claims, R$353.8 million relate to contractors’ claims, R$63.3 million relate to tax proceedings, R$128.8 million relate to labor proceedings, R$60.7 million relate to civil public actions related to environmental matters and R$165.1 million relate to other civil matters.

The table below sets forth, as of September 30, 2010, our estimated contingencies with respect to legal proceedings, categorized by potential risk of loss:

Total Value (in thousands of R$) Expected Probable Loss...... 1,402.0 Expected Possible Loss...... 2,255.0 Expected Remote Loss...... 19,635.7 Total...... 23,292.7

The difference between the provisioned amount and the total amount of the contingencies derives from the methodology for establishing our provisions. This methodology takes into account: (i) the probability of loss of each lawsuit, based on the alleged facts, the claim based on the factual circumstances vis-à-vis the law, as well as prevailing precedents in similar cases; and (ii) the calculation of the provisioned amounts, which requires significant judgment and in certain circumstances, given the nature of the claim, we are unable to estimate with accuracy our liability exposure. In these cases, we have taken into account the value attributed to the lawsuits by the plaintiff and legal opinions of counsel in charge of each lawsuit. Once the methodology is applied, as a general rule, we make the provisions only for the lawsuits that are considered as probable losses.

We cannot give any assurances either as to the sufficiency of the provisioned amount to cover the contingencies or as to the total amount of potential liabilities that we may incur or penalties that may be imposed. We may not obtain a favorable outcome in the administrative or court proceedings to which we are a party. In addition, the total amount of the contingencies, based on the value attributed to the lawsuit by the plaintiff, may not correspond to the economic value of the lawsuits, which may be substantially higher than the total estimated amount of contingencies. If the economic outcome of these lawsuits is higher than the amount attributed to the lawsuit by the plaintiff or, in the event the total amount of our provisions are not sufficient to pay the contingencies due, we

100 could incur greater costs than those that were originally estimated. If these costs are significant, our results of operations and financial condition could be negatively affected. See “Risk Factors—Risks Relating to Our Business—Any substantial monetary judgment against us in legal proceedings may have a material adverse effect on us”.

Civil Public Actions Related to Environmental Matters

We have been sued by the Public Prosecution Office of the State of São Paulo (Ministério Público do Estado de São Paulo), by some municipalities and by some non-governmental organizations in a number of environmental civil public actions: (i) seeking that we cease releasing raw sewage into certain local water courses; (ii) in some cases seeking remedies for environmental damages, which have not yet been specified and evaluated by the court’s technical experts; and (iii) seeking to require us to install and operate sewage treatment facilities in the locations referred to in the civil public actions. In each case, we are subject to daily fines for non-compliance. In our response to these lawsuits we emphasize that the installation and operation of sewage treatment facilities in the locations referred to in the civil public actions is included in our investment plan and that the immediate cessation of the release of raw sewage into the relevant local water courses would hinder us from collecting sewage—a primary necessity—in those locations, causing even more damage against the environment and public health. There have already been unfavorable judicial decisions against us. The effects may include: (i) investment in works or services not considered by the long-term investment plan; (ii) early execution of works or services that were considered for execution in future years in the long-term investment plan; (iii) payments related to environmental indemnification; and (iv) a negative impact on our image in national and international markets and in public bodies.

Although we are not able to predict the final outcome of these lawsuits, we believe that the outcome, if unfavorable to us, may have a material adverse effect on us.

The civil public lawsuits related to environmental matters to which we are party include the following:

 The Public Prosecution Office of the State of São Paulo has brought a civil public action requesting remedies due to environmental damage caused by the release of sludge from the Rio Grande water treatment facilities into certain receiving waters and the Billings reservoir and seeking the immediate cessation of this activity and the implementation of an environmental recovery project. The Trial Court ruled in our favor, and there was a subsequent appeal against this decision. In May 2006, the appellate court ruled against us and ordered us to cease the release of sludge within a year from the final ruling. The court also determined that the environmental recovery must be carried out within two years of the date of the ruling, under the penalty of a daily fine of R$10,000 to compensate for environmental damage. The appellate court decision is not final, and we are awaiting a decision from the superior courts. Our legal counsel assessed the risk of loss as probable, and we have provisioned the amount of R$1.1 million for this lawsuit, as of September 30, 2010.

 A public civil action filed by the Public Prosecution Office of the State of São Paulo against us and the Cotia Mayor’s Office seeking individual and joint adverse judgments against the defendants and requesting: (i) the permanent cessation of the release of untreated water effluents into the Cotia River or its tributaries, subject to a daily fine in the case of non-compliance; (ii) the treatment of sewage prior to its release into the Cotia River, under the penalty of a daily fine in the event of non-compliance; (iii) the full restoration of soil, of surface and underground bodies of water and of vegetation to their original condition, under the penalty of a daily fine in the event of non-compliance; (iv) the payment of compensation for environmental damage caused to soil, water sources and underground and surface bodies of water that cannot be recovered. The appellate court rendered decisions favorable to us with respect to items (i), (iii) and (iv) mentioned above. According to evaluations by the court’s technical expert, as of October 17, 2006, compensation for environmental damages was R$826,800 or R$5.8 million if damage caused to the neighboring Cotia River is included. This amount is under discussion, and its approval is subject to a final decision by the court of first instance. Our legal counsel assessed the risk of loss as probable. In September 2010, the court’s technical expert’s evaluation for the compensation was adjusted to R$9.9 million. The lawsuit is currently being enforced against us. We are in negotiation with the Public Prosecution Office of the

101 State of São Paulo to settle this lawsuit. We have provisioned R$9.9 million for this lawsuit as of September 30, 2010.

 In 2003, the Piracicaba Civil Entities Coordination Board filed a public civil action against us, the ANA and the Government of the State of São Paulo, seeking remedy for damage caused by the use of the Piracicaba, Jundiaí and Capivari river basins to supply the São Paulo metropolitan region through the Cantareira Water System for nearly 30 years. The value attributed to the claim was R$11.4 billion on December 10, 2003, and later adjusted to R$17.4 billion as of September 30, 2010. This lawsuit is in its initial stage and is pending judgment from the trial court. So far no value has been set for the damages alleged. Our legal counsel assessed the risk of loss as remote. No provision has been made for this lawsuit.

 The Public Prosecution Office of the State of São Paulo has filed a public civil action against us, AES Eletropaulo, DAEE, CETESB and the State Secretariat of Treasury seeking a joint condemnation for alleged environmental damage caused by the reversal of the Pinheiros River into the Billings Dam. A Trial Court found the defendants guilty and, based on an expert’s report which estimated the amount of damages, ruled that the defendants jointly pay R$284.5 million in damages. As of September 30, 2010, the amount of damages totaled R$568.1 million, after monetary adjustment. We, DAEE, AES Eletropaulo, CETESB and the State Treasury Department have filed an appeal against the ruling at the appellate court. The appellate court ruled in our favor. Our legal counsel assessed the risk of loss as remote. No provision has been made for this lawsuit.

 The Public Prosecution Office of the State of São Paulo has filed a civil public action against us seeking (i) that we cease releasing untreated sewage into receiving waters and into the soil; (ii) that we implement a sewage system in the municipality of Vargem Grande Paulista and the necessary infrastructure for the sewage treatment; and (iii) indemnification for irreversible damages caused to the environment and public health, subject to daily fines. The trial court ruled partially against us, and we appealed unsuccessfully. Our legal counsel assessed the risk of loss as probable. The value attributed to the lawsuit was R$3.0 million as of November 20, 2007, and later adjusted to R$3.5 million as of September 30, 2010. We have provisioned the amount of R$3.5 million for this lawsuit, as of September 30, 2010.

 The Public Prosecution Office of the State of São Paulo filed a civil public action against us and the Piracaia Mayor’s Office seeking that we cease to release untreated residential sewage in the Atibaia River or be subject to specific performance or a daily fine. The value attributed to the lawsuit was R$3.5 million as of July 11, 1996, and later adjusted to R$9.4 million as of September 30, 2010. This lawsuit is in its initial stage, pending judgment from the trial court. Our legal counsel assessed the risk of loss as possible. No provision has been made for this lawsuit.

 The Public Prosecution Office of the State of São Paulo filed a civil public action against us seeking that we (i) cease to release untreated sewage effluents into the Capivari river in the municipality of Campos do Jordão within 540 days from the filing of the lawsuit, subject to a daily fine of R$100,000; and (ii) fully restore the environmental damage or indemnify the State for such damages if restoration is not viable. The court of first instance ruled against us, and we appealed. The appellate court also ruled against us, but reduced the daily fine to R$10,000. We have appealed the appellate court’s ruling and are currently waiting for a ruling on our appeal. Our legal counsel assessed the risk of loss as probable. As of September 30, 2010, the fine due was R$10.7 million, and we have provisioned this amount.

 On April 12, 2005, the Federal Public Prosecution Office and the Federal Government sued us and the Santos Mayor’s Office requesting (i) the full restoration of the area where the outlet pipes were built to its original condition, with appropriate technical safeguards, and the conservation of the remaining trees; (ii) the maintenance of the area in a condition that is adequate for its use for the population; (iii) that an environmental license be obtained before any modification to the sewage outlet pipes, with the requirement that the license and an obligatory environmental impact study and report (Estudo Prévio

102 de Impacto Ambiental e Relatório de Impacto Ambiental (“EIA-RIMA”) be submitted for approval to the appropriate federal authorities; and (iv) the restoration of the area to the condition it was in prior to the construction of the sewage outlet pipe platform, provided this is determined to be feasible pursuant to the EIA-RIMA. The trial court ruled in our favor, but the Federal Public Prosecution Office and the Federal Government appealed the decision. We have submitted additional evidence for consideration, and we are waiting for the decision of the Regional Federal Court. Our legal counsel has assessed the risk of loss as possible. The value attributed to the lawsuit was R$1.9 million as of September 30, 2010. No provision has been made for this lawsuit.

 On October 19, 2009, the Public Prosecution Office of the State of São Paulo filed a civil public action against us and the municipality of Itatiba seeking that we (i) cease releasing untreated sewage in Itatiba or be subject to a daily fine of R$10,000; (ii) fully restore within one year the soil, the surface and underground water bodies and vegetation to their original condition, or be subject to a daily fine of R$10,000 in the event of non compliance; (iii) indemnify the State for damages when restoration is not viable; and (iv) indemnify the State in an amount not less than R$2.0 million for moral damages. This lawsuit is in its initial stage and is pending judgment from the trial court. As of September 30, 2010, the value attributed to this lawsuit was R$28,872. Our legal counsel assessed the risk of loss as possible. No provision has been made for this lawsuit.

 On August 8, 2008, the Public Prosecution Office of the State of São Paulo won a civil public action against us requiring us, within a maximum of three years, to treat all domestic sewage in Águas de Santa Bárbara before releasing it into any waterway, or be subject to a daily fine of R$1,000, as from August 8, 2008 for a maximum period of 18 months. We appealed and are waiting the appeal court’s judgment. The decision remains in effect pending our appeal. In April 2010, the Public Prosecution Office began provisional enforcement of the fine. Our legal counsel has assessed the risk of loss as probable. As of September 30, 2010, the fine due was R$1.1 million and we have provisioned R$1.1 million in respect of this lawsuit.

 A civil public action was brought against us by the Public Prosecution Office of the State of São Paulo. We appealed an unfavorable decision of the trial court, and the appeal court ruled against us, requiring us (i) to cease to release any untreated sewage into the river system in the Guareí region, or be subject to a fine of R$150,000 for each violation; (ii) to invest as necessary in the municipality of Guareí’s water treatment and sewage system so as to complete within 180 days all works necessary for sewage treatment, or be subject to a daily fine of R$100,000; (iii) to pay an indemnity in respect of all damage caused to the environment and to clean up any such damage in settlement of the judgment. The judgment was not clear as to the fines imposed and this led to an appeal, which the court refused in May 2010. After the appeal court ruled against us, we applied to have this lawsuit heard by the State of São Paulo Court of Special and Extraordinary Measures (Recursos Especial e Extraordinário pelo Tribunal de Justiça do Estado de São Paulo), and that court is currently considering whether to hear the case. Our legal counsel assessed the risk of loss as probable. As of September 30, 2010, the value attributed to this lawsuit was R$4.4 million, based on the settlement offered by the State Public Prosecution Office in July 2010, and we have provisioned R$4.4 million in respect of this lawsuit.

 The Public Prosection Office of the State of São Paulo filed a civil public action against us, requiring us (i) to cease to release any untreated sewage from the Araça pre-treatment plant (Estação de Pré Condicionamento (“EPC”) into the São Sebastião canal without obtaining the necessary environmental licences, or be subject to a daily fine of R$100,000; (ii) to obtain and maintain the necessary environmental licence to operate the Araça EPC, or be subject to a daily fine of R$100,000; (iii) to release into the São Sebastião canal only domestic sewage that complies with legal guidelines; (iv) to comply with all of the technical requirements set out in the environmental licence, as well as the requirements specified following inspections by the CETESB; and (v) to pay an indemnity of R$50.0 million for environmental damage. The preliminary judgment was deferred, and SABESP was required (i) to present to the court within six months the environmental licence for the Araça EPC, or be subject to a daily fine of R$100,000, and (ii) to present to the court within 30 days a contract with a company to carry out an independent technical study with monthly reporting to monitor and collect samples

103 from the areas of São Sebastião canal where there are underwater outlets from the Araça EPC, as well as from the beaches and mangroves within 8 km to the north of south of the Araça EPC. The sediment samples from the mangroves were required to be analyzed for the existence of faecal coliforms as well as water quality. This lawsuit is in its initial stage and is pending judgment from the court of first instance. Our legal counsel has assessed the risk of loss as possible. The value attributed to the lawsuit as of September 30, 2010 was R$65.9 million. No provision has been made for this lawsuit.

 The municipality of Águas de São Pedro filed a civil public action against us on September 14, 2004, with a request for summary judgment or the imposition of a daily fine. This lawsuit aims to require us to undertake works and services necessary to remove the direct discharge of sewage beside the green areas and the Pantanal source and lake that are located close to Rua dos Pinheiros, in the Bairro Jardim Iporanga district of the municipality of Águas de São Pedro. It also aims to require us to pay indemnities for alleged damage caused to the environment, to health and to citizen’s property. On June 26, 2006, the court of first instance ruled that the claim was without merit. However, on September 22, 2009, the appeals court ruled that the claim was proven and granted an injuction, ordering us to comply with the requirement to clean up the environmental damage within 180 days in satisfaction of the judgement, and imposing a daily fine of R$5,000. Our legal counsel has assessed the risk of loss as probable. The value attributed to this lawsuit as of September 30, 2010 was R$12.5 million, and we have recorded provisions in this amount as of that date. Currently, we are awaiting the response from the State of São Paulo Court of Special and Extraordinary Measures (Recursos Especial e Extraordinário pelo Tribunal de Justiça do Estado de São Paulo) in relation to this lawsuit.

We are currently involved in other environmental lawsuits and administrative proceedings against the release of untreated sewage in the municipalities, which have been evaluated as probable and possible losses. The amounts provisioned may not always represent the final amount to be paid as compensation for the alleged damages, in view of the current status of the lawsuits and since our management cannot reasonably estimate the amounts of future disbursements. As of September 30, 2010, the total amount provisioned was R$60.7 million.

Labor Proceedings

We are party to labor proceedings, mainly regarding unpaid overtime, health and safety conditions in the workplace, among others. We make provisions for part or the entire amounts involved in the proceedings. For those cases in which the probability of loss is assessed as probable, we provision the full amounts being discussed.

As of September 30, 2010, we were party to approximately 4,759 labor proceedings and one public civil action filed by some of our current and former employees. Some of these lawsuits seek to negotiate certain benefits granted by Law No. 4,819 of August 26, 1958. Approximately 40 plaintiffs are claiming the same benefits in the civil court and in these cases. Our position in these lawsuits is that the State government, and not us, should be responsible for the payments due to the plaintiffs. In the public civil action filed against us and the State Treasury, a temporary injunction was granted in the trial court requiring us to pay the benefits set forth in Law No. 4,819/58 to all the plaintiffs. A trial court ruled on April 5, 2005, granting the relief sought under this proceeding and confirming the temporary injunction requiring us to continue to pay the benefits. We have appealed this decision. There are currently other pending individual lawsuits discussing the same claims, and up to the date of this report neither we nor the State government had reached an agreement as to the indemnification amounts related to these proceedings.

As of September 30, 2010, the total amount in controversy in the labor proceedings was R$274.4 million for risks considered as probable and possible losses. We have established a provision of R$128.8 million as of September 30, 2010 for these contingencies, including the lawsuits described in the preceding paragraphs, based on calculations made by our legal and human resources departments.

104 Tax Proceedings

Our tax proceedings and our contingency reserves for tax proceedings refer mainly to tax collection suits resulting from different interpretations by us and the competent government authority with respect to the applicable law. The tax proceedings to which we are party include the following:

 We are challenging the city of São Paulo’s taxation of the use of public areas for the installation of water and sewage mains for the provision of public sanitation services. The tax was originally established by municipal decree No. 38,139/99 and later replaced by municipal decree No. 40,532/2001 and finally by the municipal Law No. 13,614/2003. On February 22, 2000, we filed a writ of mandamus requesting an injunction to challenge this tax. This first lawsuit covers the taxation before the enactment of municipal Law No. 13,614/2003. The trial court ruled partially in our favor, by prohibiting the requirement to pay the tax provided for in this law, and the appellate court confirmed that the tax was not due. The city of São Paulo appealed this decision, and a final decision is pending. On April 20, 2004, we filed a writ of mandamus challenging Law No. 13,614/2003. We requested a temporary injunction against the collection of this tax, which was granted by the trial court. The São Paulo city government appealed this decision, and an appellate court decision is still pending. We cannot estimate the potential increase in our expenses should we have to pay this tax for the use of public areas for the installation of water and sewage mains for the provision of public sanitation services should we be required to pay such tax since 1999. We have not provisioned for any type of potential expense deriving from this municipal tax.

 We filed a writ of mandamus challenging municipal law 13,476/2002. Before the enactment of this law, we were exempted from the payment of the Brazilian Service Tax (Imposto Sobre Serviço) (“ISS”). The trial court originally granted a preliminary injunction in our favor, suspending the levy of the tax, but later ruled against us. In July 2005, we filed an appeal to maintain the injunction previously granted. The final ruling has not yet been issued, but we believe that the outcome will be favorable to us.

 With respect to the ISS, the Secretariat of Treasury of the city of São Paulo drew up collection assessment notices on September 18, 2006, against which we filed a challenge and a subsequent administrative objection. Our challenge was partially accepted, but our administrative objection was not recognized. As a result of irregularities in the administrative order that did not recognize our administrative objection, we filed a lawsuit requesting an injunction to suspend and ultimately annul the assessment notices. The amount involved was estimated at R$70.0 million, and later adjusted to R$173.6 million, as of September 30, 2010. Based on the opinion of our legal counsel, our risk of loss is possible.

 We proposed to carry-over losses from previous years to offset an income tax liability of approximately R$56.1 million and a social contribution tax liability of approximately R$8.7 million. These amounts refer to the period between January and April 2003. In 2005, the Federal Revenue Service denied the set-off of approximately R$11.2 million related to income tax liability and R$0.7 million related to social contribution tax liability, totaling R$11.9 million, and allowed us to compensate the remaining portion. We appealed this decision, and our request was partially granted. As of September 30, 2010, we recorded a provision of R$1.1 million as a probable loss, but did not record any provision in respect of the R$6.2 million we considered as a possible loss.

 In 2006, the Federal Revenue Service concluded that, for the year 2001, we had an income tax liability and social contribution tax liability totaling R$277.0 million (R$352.9 million, as adjusted as of September 30, 2010) and initiated administrative collection proceedings against us. We filed an administrative objection to this collection proceeding. Based on the opinion of our legal counsel, the risk of loss is remote with respect to approximately 90% of this amount and a possible risk of loss with respect to the remaining 10%.

105  In 2008, the Federal Revenue Service denied six requests for compensation to offset income tax and social contribution tax liabilities. We proposed to offset income tax and social contribution tax paid in excess against our tax liability. The amount involved in these proceedings was R$38.7 million as of September 30, 2010. Based on the opinion of our internal legal counsel, the risk of loss is possible.

 In November 2004, we filed a writ of mandamus against the municipality of Bragança Paulista regarding the imposition of a new tax for the use of public areas for the installation of water and sewage mains for the provision of public sanitation services. On February 16, 2005, we were granted a temporary injunction suspending the imposition of this tax and preventing the municipality from collecting any current or future amounts due in respect of this tax until a ruling is rendered by the trial court. In June 2005, the trial court ruled in our favor by confirming the injunction. In July 2005, the municipality of Bragança Paulista filed an appeal to the São Paulo appellate court, and the appellate court decision is still pending. We have not made any provisions for this proceeding.

We cannot predict the outcome of any of these lawsuits, nor can we assure you that, in the event of an adverse decision, we will be able to pass on to our customers any increase in our deductions from gross revenue, operating expenses or other expenses. See “Risk Factors—Risks Relating to Our Business—Any substantial monetary judgment against us in legal proceedings may have a material adverse effect on us”.

Condemnation Proceedings

We are party to a significant number of condemnation proceedings arising from the partial or total expropriation or use of private property for water mains, sewer lines and facilities. Under Brazilian law, the State or the relevant municipality is entitled to condemn private property to the extent required for the construction, development or improvement of water and sewage systems operated by us. However, we are required to provide compensation to affected property owners based upon appraised fair market values. Although we generally provide compensation to property owners on the basis of negotiated settlements, we are a party to many lawsuits related to compensation awards.

As of September 30, 2010, the future disbursement was estimated at R$579.1 million, as to all proceedings regarding expropriation and easements. These payments are made over a period of one year, according to each court order or settlement. After making each payment, we will obtain the title to the respective real property which will be recorded as an asset belonging to us after being expropriated. We have not provisioned any amounts with regard to these proceedings.

Concession-Related Legal Proceedings

In December 1997, the municipality of Santos enacted a statute expropriating our water and sewage systems located in Santos. We filed a writ of mandamus requesting a temporary injunction against the expropriation, which was denied by the trial court. This decision was subsequently reversed by the appellate court, which then issued a temporary injunction suspending the effectiveness of the statute. By August 2, 2002, both the trial and appellate courts had ruled in our favor, but we are currently waiting for a final decision.

On December 20, 2000, SABESP brought an action against the municipality of Santos for payments due under the concession agreement. Both parties appealed the decision of the courts of first and second instance, and we are currently awaiting the decision of the higher appeal court. We continue to render water and sewage collection services in the municipality of Santos.

On March 25, 2005, the municipality of Itapira approved a decree revoking our concession contract. In addition, a municipal law was enacted revoking an earlier law authorizing the municipality to enter into the contract with us. The municipality of Itapira has further filed a repossession lawsuit seeking to repossess all of the reversible assets, rights, and privileges transferred to us in connection with water and sewage collection services, and has obtained an injunction which was later confirmed by an appellate court decision. We appealed this decision but we later decided to waive this appeal and filed a compensation lawsuit against the municipality of Itapira.

106 The municipality of Tuiuti has filed a lawsuit seeking to recognize the inexistence of any judicial or legal grounds for us to provide water and sewage collection services in the municipality of Tuiuti, and to confirm the legality of the expropriation of these services by the municipality. We filed an answer to the lawsuit requesting that the trial court (i) confirm the existence of a legal relationship between us and the municipality of Tuiuti; and (ii) award damages for the expropriation of our assets. The trial court ruled against us but awarded us an indemnity of R$541,000, to be updated since March 2006. Both parties appealed this decision, and we are currently waiting for an appellate court decision. We are not currently operating in the municipality of Tuiuti.

The municipality of Cajobi has filed a repossession lawsuit. This lawsuit requests the repossession of water and sewage collection services due to the termination of the concession agreement on November 13, 2006, and an indemnity for all amounts paid to us for water and sewage collection services after November 2006, as well as payments for the use of all the reversible assets, rights and privileges transferred to us in the concession agreement. The municipality has been rendering the water and sewage collection services since May 29, 2007, based on a judgment by the court of first instance. The amounts involved in this lawsuit are still being evaluated in the judicial proceedings.

The municipality of Monte Alto has filed a repossession lawsuit. This lawsuit requests the repossession of water and sewage collection services due to the termination of the concession agreement entered into with us and an indemnity for all amounts paid to us for water and sewage collection services after the termination, as well as payments for the use of all the reversible assets, rights and privileges transferred to us in the concession agreement. We reassumed the water and sewage collection services in this municipality in June 2008, following an agreement with the municipality.

The municipality of Araçoiaba da Serra has filed a repossession lawsuit requesting the repossession of water and sewage collection services due to the termination of the concession agreement entered into with us and an indemnity for all amounts paid to us for water and sewage collection services after the termination on September 23, 2006, as well as payment for the use of all the reversible assets, rights and privileges transferred to us in the concession agreement. A temporary injunction was granted by the appellate court in favor of the municipality of Araçoiaba da Serra and confirmed by the superior courts. The lawsuit is currently in the discovery phase.

We have filed a lawsuit to collect indemnities from the municipalities of Diadema e Mauá. These indemnities result from the unilateral termination by these municipalities of the concession contracts entered with us in 1995. We have invested in the construction of water and sewage collection systems in these municipalities to render the contracted services. As a result of the termination of these concession agreements, the municipalities started to directly render water and sewage collection services.

With respect to the collection suit against the municipality of Diadema, in December 2007, the trial court ruled in our favor. The municipality appealed from the decision to the appellate court, and the appellate court decision is still pending. In December 2008, we entered into an agreement with the municipality of Diadema to negotiate the repossession of the water and sewage collection services by us and to also negotiate the indemnity being disputed before the courts.

With respect to the collection suit against the municipality of Mauá, the trial court ruled in our favor, ordering the municipality to pay us R$153.2 million as compensation for our losses. The municipality appealed this decision to the appellate court, which upheld the trial court’s decision in August 2008. This decision is not yet final as the municipality has the right to appeal.

We have recorded the indemnities to be received from the municipalities of Diadema and Mauá as non-current assets representing long-term receivables. As of September 30, 2010, this amount totaled R$146.2 million.

Following the expiry of our concession contract with the municipality of Iperó, the municipality filed a repossession lawsuit requesting the repossession of assets relating to water and sewage services. In response, we filed a lawsuit on December 30, 2009 to maintain possession or to collect indemnities. A temporary injunction was granted in our favor on January 5, 2010, but it was thereafter annulled by the court of first instance on January 6, 2010. We filed an interlocutory appeal, but it was not accepted. Currently, this lawsuit is at the appeals stage with

107 respect to the submissions by both parties. We also filed a precautionary early evidence order in the jurisdiction of the Secretariat of Treasury, which resulted in a summary judgment requiring the early presentation of evidence to establish what assets are related to the provision of the services rendered by SABESP in the municipality of Iperó.

The munipality of Tarumã filed a lawsuit against us in July 2010 requesting an interim injunction requiring (i) the repossession of existing assets necessary for providing water and sewage collection, distribution and treatment services, and (ii) the presentation of documentation demonstrating current income and expenses in the municipality and invoices for services and goods purchased by us to provide services, in order to calculate the indemnity due under article 35, paragraph 4, of the Federal Concessions Law 8,987/95. The lawsuit requested (i) a search warrant if we did not provide the income and expenses information and invoices, (ii) the imposition of a daily fine against us and (iii) that the interim injunction be converted into a permanent order, with the declared assets remaining under the control of the municipality until the payment of the indemnity provided for under article 36 of the Federal Concessions Law. This lawsuit is in the discovery stage, and no definitive judgment has been rendered. As a result of the interim injunction, we are not operating in the munipality of Tarumã.

SABESP filed an ordinary action against the municipality of President Prudente on January 12, 2001, seeking (i) a declaration in respect of its contractual right to continue to render the services under its concession agreement in the municipality until the formal legal rescission of the concession agreement and (ii) the payment of indemnities. The action also sought a declaration that the acts and threats of the municipality in connection with its planned expropriation were illegal and abusive. A judgment has been handed down confirming SABESP’s right to continue to render the services. The decision was appealed, and the decision of the appeal court is still pending. SABESP continues to render services in the municipality of Presidente Prudente pursuant to State Decree No. 21,228/2010, which extended the term of the concession agreement with the municipality until March 2011.

Tariff-Related Legal Proceedings and Consumer Claims

As of September 30, 2010, approximately 1,420 lawsuits had been brought by our commercial customers that claim that their tariff rates should be equal to those of another category of customers and, consequently, seek the reimbursement of the difference between the amounts we collected and those tariffs. We have obtained final decisions both in favor and against us in many of these lawsuits, and have provisioned R$630.4 million as of September 30, 2010 for those lawsuits for which we have determined that the risk of loss is probable.

The Association of Distinguished Bars and Restaurants (Associação de Bares e Restaurantes Diferenciados) has initiated several lawsuits to challenge the 10.0% penalty fee we charge on late water and sewage payments. In several of these cases, trial courts have dismissed the lawsuits based on the plaintiffs’ lack of standing to initiate such a lawsuit. In other cases, the lawsuits were dismissed because a civil public action with respect to the same matter was already being heard in the civil courts of the State of São Paulo. In this civil public action, the civil courts ruled against us, and we have appealed the decision and a decision from the appellate court is still pending. Notwithstanding these legal proceedings, we have reduced to 2.0% the penalty fee we charge all of our customers on late bill payments.

Contractors’ Claims

Certain contractors have filed claims against us alleging damages and underpayment of inflation indexation adjustments, monetary losses incurred in connection with introduction of the real and economic instability of the contract, among other claims. These suits are being handled by different courts, and we have established provisions for them when the expectation of loss is considered probable. As of September 30, 2010, we had recorded a provision of R$353.8 million for claims whose likelihood of loss is considered probable.

Other Legal Proceedings

We are a party to several civil lawsuits related to indemnities for property damage, pain and suffering, and loss of profits allegedly caused to third parties. In the year ended December 31, 2009, there was an increase both in the number of lawsuits with probable and possible risk of loss, arising from the increase in lawsuits and the review

108 of the expected outcomes, comprising monetary adjustment, interest and fees. As of September 30, 2010, we had recorded a provision of R$165.1 million, for claims whose likelihood of loss is considered probable.

The São Paulo State Public Attorney’s Office has filed a public civil action against SABESP seeking (i) to ensure water supply in the municipality of Guarujá is within accepted levels of potability and in accordance with current legislation; (ii) to require us to start building a water treatment station; (iii) to require us to reimburse fees charged to consumers; and (iv) to require us to pay compensation for physical harm and pain and suffering caused by allegedly improper water consumption. A temporary injunction was granted to the São Paulo State Public Attorney’s Office, and we appealed the decision. Our appeal was rejected by the appellate court. We have presented an answer to the complaint, and the lawsuit is currently in the discovery phase. We have not yet estimated our potential liability with respect to this lawsuit because we currently do not have sufficient information to accurately do so. We evaluated this proceeding as a possible loss.

On October 29, 2003, the São Paulo State Public Attorney’s Office, on behalf of the people of the State of São Paulo, filed a civil public action in a trial court of the State of São Paulo alleging that a transfer to us of ownership of the Alto Tietê System reservoirs from the DAEE would be illegal. In October 2004, the court of first instance handed down its judgment on the civil public action and declared the agreement between SABESP, DAEE and the State of São Paulo null and void. This decision was suspended and SABESP, the State Treasury and DAEE appealed the decision. On August 23, 2010, the appeal was denied. We have petitioned for clarification of the appeal court’s decision and will seek to take the case to the Supreme Court. The effects of the appeal court’s decision will be suspended until the end of the legal process. Our legal counsel has assessed the risk of loss as probable, which would prohibit the transfer of the reservoirs in payment of the accounts receivable due from the State.

We are a party to a substantial number of other legal proceedings, in addition to the lawsuits and administrative proceedings discussed above, in the ordinary course of our business. These legal proceedings include personal injury and property damage cases, environmental proceedings, challenges to our ability to cease rendering water and sewage services upon default by our customers and a range of other matters. We have not established provisions with respect to these other legal proceedings.

Government Regulation

Basic sanitation services in Brazil are subject to extensive federal, state and local legislation and regulation that, among other matters, regulates:

 the granting of concessions to provide water and sewage services;

 the development of public private partnerships;

 the need for a public bidding process for the appointment of private water and sewage services providers;

 the need to set up an agreement for the appointment of public water and sewage services providers;

 the joint management of public services through cooperation, allowing for a program agreement without the need for a public bidding process for the service provider, subject to the condition that the planning, execution and monitoring activities are not executed by the service provider;

 minimum requirements for water and sewage services;

 water usage;

 water quality and environmental protection; and

 governmental restrictions on the incurrence of indebtedness applicable to state-controlled companies.

109 General

Pursuant to Article 23 of the Brazilian Constitution, water and sewage services are the joint responsibility of the federal government, the states and the municipalities. Article 216 of the Constitution of the State of São Paulo provides that, by law, the State must provide the conditions for efficient management and adequate expansion of water and sewage services rendered by its agencies and State-controlled companies or any other concessionaire under its control. State law authorized our formation to plan, provide and operate water and sewage services in the State and also acknowledged the autonomy of the municipalities.

Pursuant to Article 175 of the Brazilian Constitution, the rendering of public services, such as water and sewage services, is the responsibility of the applicable public authority. However, any such public authority has the right to render these services directly or through a concession granted to a third party.

In Brazil, there are three federal legal regimes for contracting water and sewage services: (i) public concessions, regulated by Law No. 8,987/1995, which require a prior public bidding process; (ii) administration of public services through cooperation agreements between the federal government and local public authorities at State and municipal level without the need for a public bidding process, regulated by the Public Consortia and Cooperation Agreement Law; and (iii) public-private partnerships, regulated by Law No. 11,079/2004, used to grant concessions to private companies to provide public services and used in relation with construction works associated with the provision of public services. Until 2005, we had adopted the regime for public concessions. Following the entry into force of the Public Consortia and Cooperation Agreement Law, we adopted the administration of public services through cooperation agreements, which can be used alongside the other two regimes.

The Public Consortia Law and Cooperation Agreement Law and the Basic Sanitation Law have caused significant impacts in the development of the state sanitation policy and the regulatory structuring of the industry.

Because we are the legal concessionaire for the State of São Paulo for water and sewage services, serving approximately 60.0% of the State’s population and providing sanitation services through concession agreements, the Consortium Law affects us on the expiry of our concession agreements entered into in the 1970s when the Brazilian Sanitation Plan (Plano Nacional de Saneamento) (“ PLANASA”) was created. The Consortium Law has caused important changes in the relationship among municipalities, states and public sanitation service providers, most notably in mixed capital companies, such as us, because of the implementation of the program agreements as a substitute for concession agreements.

In addition, the Basic Sanitation Law, in its role as a general guideline for the development of the Brazilian sanitation industry, addresses the conditions for the delegation of water and sewage services, the exercise of ownership by the granting authority and the regulatory conditions for the industry. The Basic Sanitation Law also provides for a significant amendment to Article 42 of the Concessions Law, which establishes the termination of concessions prior to the expiration date and the reversibility conditions for unamortized assets. The amendment requires that the service provider be compensated for unamortized assets, prioritizing an agreement between the parties setting out the criteria for calculation and payments of indemnity.

The Basic Sanitation Law

On January 5, 2007, the Federal Law No. 11,445 (“Basic Sanitation Law”) was enacted, establishing nationwide guidelines for basic sanitation and seeking to create appropriate solutions for the situation of each state and municipality, facilitating the technical cooperation between the state and municipalities. In addition, the federal government will enact its public policy to facilitate access to financing alternatives that are compatible with the costs and terms of the sanitation industry, in substitution of the PLANASA model. On June 21, 2010, the federal government enacted Federal Decree No. 7,217, regulating the Basic Sanitation Law. See “Risk Factors—Risks Relating to Our Business—We cannot anticipate the effects that further developments of the Basic Sanitation Law and its interpretation will have on the basic sanitation industry in Brazil and on us”.

The Basic Sanitation Law establishes the following principles for basic sanitation public services: universalization, integrality, efficiency and economic sustainability, transparency of actions, social control and

110 integration of infrastructure and services with the management of water resources. It does not define the ownership of the sanitation services, but establishes the minimum liability for the exercise of ownership, such as the development of the sanitation plan, definition of the person responsible for regulation and control, establishment of the rights and obligations of the users and of the social control mechanisms. It also defines the regionalized performance of the services (i.e., one single provider serves two or more owners, for which there may be one plan for the combination of services).

In addition, the Basic Sanitation Law defines the guidelines and objectives of the federal basic sanitation policy to be observed when securing public funds generated or operated by agencies or entities of the federal government, and foresees the possibility of having subsidies as an instrument of social policy to ensure access to basic sanitation services to everyone, particularly the low-income population. The subsidies may be granted either directly through tariffs or indirectly, depending on the characteristics of the beneficiaries and on the source of the funds.

Furthermore, the Basic Sanitation Law also provides that the sanitation services may be interrupted by the service provider in the event of default of payment of the tariffs by the customer, among other reasons, after written notice, as long as minimum health requirements are met.

The Basic Sanitation Law also establishes the criteria for the reversal of assets at the time of termination of the agreement and with regard to the concessions, such as those that have expired or are effective for an indefinite term, or those that were not formalized by an agreement. In addition, the Basic Sanitation Law provides the basis for calculating the amount of any indemnity due, which must be calculated by a specialized institution chosen by mutual agreement between the parties.

Pursuant to the Basic Sanitation Law, the parties to the concession may enter into an agreement with respect to the payment of the indemnification due to the concessionaire. However, in the absence of an agreement, the Basic Sanitation Law establishes that the indemnification must be paid in no more than four equal and successive annual installments, with the first installment payable by the last business day of the fiscal year in which the assets are reversed.

Concessions

Concessions for providing water and sewage services are formalized by agreements executed between the state or municipality, as the case may be, and a concessionaire to which the performance of these services is granted in a given municipality or region. Our concessions normally have a contractual term of up to 30 years, although some of these concessions have an indefinite term of effectiveness. However, our concessions in general can be revoked at any time if certain standards of quality and safety are not met, or in the event of default of the terms of the concession agreement.

A municipality that chooses to assume the direct control of its water and sewage services must terminate the current relationship by duly compensating the service provider. Subsequently, the municipality will be in charge of rendering services or of conducting a public bidding process to grant the concession to potential concessionaires, including agreements with public companies directly. Although the Constitution of the State of São Paulo determines that the relevant municipality would have to pay us for the unamortized book value of the assets related to the concession and assume any corresponding debt, with the exclusion of any amounts that have been paid to us by the municipality, upon termination or non-renewal of the concession, the payment for termination may not be effected immediately, and any termination could negatively affect our cash flows, operating results and financial condition. See “Risk Factors—Risks Relating to Our Business—Municipalities may, under certain circumstances, terminate our concessions before their expiration and the compensation may be inadequate to recover the full value of our investments”.

The Federal Concessions Law No. 8,987/1995 and the State Concessions Law No. 7,835/1992 require that the granting of a concession by the government be preceded by a public bidding process. However, the Federal Public Bidding Law No. 8,666/1993, which establishes the rules for the public bidding process, provides that a public bidding process can be waived under certain circumstances, including in the case of services to be provided by a public entity created for such specific purpose on a date prior to the effectiveness of this law, provided that the

111 contracted price is compatible with what is practiced in the market. Furthermore, the Federal Public Bidding Law, as amended by the Public Consortia and Cooperation Agreement Law, provides that the program contracted can be executed with waiver of a public bidding process.

In the majority of municipalities where we operate, the new contracts have been formalized pursuant to the provisions of the Federal Public Bidding Law that allows the public bidding process to be waived under certain circumstances. However, due to the discussion over whether the State or municipal authorities have the right to grant rights to provide basic sanitation services in municipal areas, negotiations to agree our new contract for the provision of water and sewage services in the city of São Paulo, were more complicated. See “Related Party Transactions―Agreement with the State and the City of São Paulo”.

On November 25, 2003, the Municipal Law No. 13,670/2003 was enacted creating the Municipal System for Regulation of Water Supply and Sanitary Sewage Services (Sistema Municipal de Regulação dos Serviços de Abastecimento de Água e Esgotamento Sanitário), providing for its constitution and operation and also establishing the Municipal Sanitation Plan (Plano Municipal de Saneamento). According to this law, the Mayor of the city of São Paulo has powers to grant and monitor formal concessions for water and sewage services in the city of São Paulo. Subsequent to the Municipal Law No. 13,670/2003, the Governor of the State filed a legal action claiming that this law was unconstitutional and, as a consequence, the applicability of the Municipal Law No. 13,670/2003 was suspended. On April 20, 2005 the court ruled, by majority of votes, in favor of the Governor of the State. The city of São Paulo appealed the decision and a final decision is still pending to this date.

On June 18, 2009, the Municipal Law No. 14,934/2009 was enacted, authorizing the city of São Paulo to enter into an agreement with SABESP. This law revoked the Municipal Law No. 13,670/2003. On June 23, 2010, we entered into a formal agreement with the State and the city of São Paulo to regulate the provision of water and sewage services in the city of São Paulo for a 30-year period, which may be extended for an additional 30-year period.

Public Consortia and Cooperation Agreement Law for Joint Management

On April 6, 2005, the federal government enacted Federal Law No. 11,107, or the Federal Public Consortia and Cooperation Agreement Law, which regulates Article 241 of the Brazilian Constitution. This statute provides general principles to be observed when a public consortia enters into contracts with the Brazilian political divisions and subdivisions (the federal government, states, the Federal District and municipalities) aiming at the joint management of public services of common interests.

Federal Decree No. 6,017/2007 details the conditions of establishment of joint management and the execution of the program agreement regulating the Public Consortia and Cooperation Agreement Law. This federal legislation introduces significant changes in the relationship among municipalities, states and companies providing public sanitation services, prohibiting the latter from exercising activities of planning, oversight and regulation, including tariff regulation, of the services and creating the program agreement for contracting entities whose share control is held by one of the Brazilian political divisions and subdivisions upon waiver of the public bidding process and compliance with concession legislation, as applicable.

On January 13, 2006, the Governor of the State of São Paulo enacted State Decree No. 50,470, amended by State Decrees No. 52,020, dated July 31, 2007, and No. 53,192, dated July 1, 2008, which provide for the rendering of water and sewage services in the State of São Paulo. According to these decrees, we may enter into agreements with municipalities in connection with the provision of water and sewage services by means of the so-called “program agreement without a public bidding process”. In addition, these decrees establish that we will continue to render services in the areas covered by the concession granted by the State.

Based on these statutes, in January 2007 we executed our first program agreement with the municipality of Lins, located in the State of São Paulo. Lins created its own regulatory agency to oversee and regulate the basic sanitation services. Subsequently, we formalized agreements with other municipalities in the State of São Paulo. These other municipalities transferred the oversight and regulation of our services to the State of São Paulo through a cooperation agreement.

112 On June 8, 2006, the State of São Paulo enacted Decree No. 50,868 creating the Commission for the Regulation of Sanitation Service of the State of São Paulo (Comissão de Regulação do Serviço de Saneamento do Estado de São Paulo – CORSANPA) to regulate sanitation services. The Commission for the Regulation of Sanitation Service of the State of São Paulo was directly subordinated to the State Secretariat for Sanitation and Energy (Secretaria de Estado de Saneamento e Energia).

The main duty of the Commission for the Regulation of Sanitation Service of the State of São Paulo was conducting studies for the creation of a regulatory agency for the basic sanitation industry and the presentation of legal and regulatory measures. The completion of such duties resulted in the publication of supplementary Law No. 1,025 of December 7, 2007, creating the ARSESP.

The ARSESP regulates the basic sanitation services that belong to the State, relating to the federal and municipal jurisdictions and prerogatives, and exercises the following functions:

 complies with and enforces state and federal basic sanitation legislation;

 publishes the organizational platform for the services, indicating the types of services provided by the state, as well as the equipment and facilities that compose the system;

 assumes, where applicable, the legal attributions of the jurisdictional authority;

 establishes, in accordance with the tariff guidelines defined by Decree No. 41,446/96, tariffs and other methods that provide compensation for our services, adjusts and reviews such tariffs and methods to ensure the financial-economic balance of services and low-cost tariffs through mechanisms that increase service efficiency and lead to the distribution of productivity gains to society; and

 approves, oversees and regulates (including tariff issues) sewage treatment and wholesale water supply agreements entered into between the state supplier and other suppliers, pursuant to Article 12 of the Basic Sanitation Law.

With respect to municipal basic sanitation, the ARSESP oversees, controls and regulates (including tariff issues) services that have been delegated by municipalities to the state as a result of cooperation agreements that formalize the program agreements between municipalities and us that provide for the execution of these services. If possible and convenient for the municipality, it can act on agreements executed prior to the enactment of the current regulation.

For its services, the ARSESP charges 0.50% of the annual total invoice of the municipality. This fee is collected either from municipalities that have a signed program agreement with us or municipalities in the São Paulo metropolitan region.

Supplementary Law No. 1,025/2007 also amended paragraphs 5, 7 and 8 and added paragraphs 9 and 10 to Article 1 of State law 119/73, which created us, expanding the range of services that we can render, with the inclusion of urban rainwater drainage and management, urban cleaning and solid waste management, as well as the operation of power generation, storage, conservation and sales activities, for our own or third-party use.

In addition, the rules simplified the process for the expansion of our business in Brazil and abroad, authorizing us:

 to participate in the controlling block or the capital of other companies;

 to create subsidiaries, which may become majority or minority shareholders in other companies; and

 to establish partnerships with national or foreign companies, including other state or municipal basic sanitation companies in order to expand our activities, share technology and expand investments related to basic sanitation services.

113 Furthermore, the supplementary Law No. 1,025/2007 maintained the State Sanitation Council (Conselho Estadual de Saneamento – CONESAN), created by Supplementary Law No. 7,750/92, as an advisory council to define and implement the state basic sanitation policy, and the State Sanitation Fund (Fundo Estadual de Saneamento - FESAN). The State Sanitation Fund is connected to the State Secretariat for Sanitation and Energy, and collects and manages resources that support State-approved programs, as well as the development of technology, management and human resources and a sanitation information system, in addition to other support programs.

On November 13, 2009, the ARSESP published Resolution No. 106 establishing technical conditions giving the ARSESP authority to oversee and regulate the provision of state and municipal owned water supply and sanitary sewage services that are delegated to the State, including tariff regulation. Technical, economic and financial viability studies have not yet been carried out for the implementation of the new rules and therefore it is not possible to estimate the impact thereof.

Public-Private Partnerships

The PPP is a form of agreement with the public administration used for the concession of services to private enterprises, as well as for construction works coupled with the provision of services. PPPs are regulated in the State of São Paulo by Law No. 11,688, which was enacted on May 19, 2004. PPPs may be used for: (i) implantation, expansion, improvement, reform, maintenance, or management of public infra-structure; (ii) provision of public services; and (iii) exploitation of public assets and non-material rights belonging to the State.

Payment is conditional upon performance. The payment may be collected through: (i) tariffs paid by users; (ii) assignment of credits belonging to the concession holder, except taxes; and (iii) transfer of rights related to the commercial exploitation of public assets.

Public Financing

In January 2007, the President of Brazil announced a new Growth Acceleration Plan, known as the “PAC”, which includes major investments in infrastructure services, including the provision of water and sewage, housing, as well as highways, airports, ports and energy services, that would benefit the poor population of Brazil. PAC calls for a total investment of R$504.0 billion through 2010, including a R$40 billion investment in the sanitation sector. The majority of the investment of the PAC would be provided by State-owned companies and the private sector, while the rest would come from the federal government. Of the amounts dedicated to the sanitation sector, SABESP has obtained various loans from the BNDES and Caixa Econômica Federal totaling approximately R$2.8 billion, the proceeds of which are being used to fund various projects. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness Financing.”

Public Bidding Procedures

Pursuant to the Federal Public Bidding Law, the public bid process commences with publication by the granting authority in a federal, state or municipal official newspaper, as the case may be, and another leading Brazilian newspaper. The publication announces that the granting authority will carry out a public bidding contest pursuant to provisions set forth in an edital (invitation to bid). The invitation to bid must specify, among other terms: (i) the purpose, duration and goals of the bid; (ii) the participation of bidders, either individually or forming a consortium; (iii) a description of the qualifications required for adequate performance of the services covered by the bid; (iv) the deadlines for the submission of bids; (v) the criteria used for selection of the winning bidder; and (vi) a list of the documents required to establish the bidder’s technical, financial and legal capabilities.

The invitation to bid is binding on the granting authority. Bidders may submit their proposals either individually or in consortia, as provided for in the invitation to bid. After receiving proposals, the granting authority will evaluate each proposal according to the following criteria, which must have been set forth in the invitation to bid:

 the technical quality of the proposal;

114  lowest cost or lowest public service tariff offered;

 a combination of the criteria above; or

 the largest amount offered in consideration for the concession.

The provisions of State Law 6,544 of November 2, 1989, as amended, or the State Public Bidding Law, parallel the provisions of the Federal Public Bidding Law. The Federal and State bidding laws will apply to us in the event that we seek to secure new concessions. Moreover, these bidding laws currently apply to us with respect to obtaining goods and services from third parties for our business operations or in connection with our capital expenditure program, in each case subject to certain exceptions.

Water Usage

State law establishes the basic principles governing the development and use of water resources in the State of São Paulo in accordance with the State constitution. These principles include:

 rational utilization of water resources, with service to the segments of the population identified as having priority;

 optimizing the economic and social benefits resulting from the use of water resources;

 protection of water resources against actions which could compromise current and future use;

 defense against critical hydrographic events which could cause risk to the health and safety of the population or economic and social losses;

 development of hydro-transportation for economic benefit;

 development of permanent programs of conservation and protection of underground water sources against pollution and excessive exploitation; and

 prevention of erosion of land in urban and rural areas, with a view to protecting against physical pollution and silting of water resources.

Under State law, implementation of any project that involves the use of surface or underground water requires prior authorization or licensing from the competent government authority. In order to implement these principles, authorizations granting a right of use are required from the relevant public authority for water usage (whether for collection, release of effluents or otherwise), modification of the regime and modification of the quality or the quantity of the existing water. In the case of rivers under the federal government’s domain (rivers crossing more than one state), the ANA is the public authority which grants the authorization. With respect to the rivers under a state’s domain, the applicable state authority has jurisdiction to grant the right of use. In the State of São Paulo, the DAEE is the public authority responsible for granting such authorizations. The DAEE has, as its objectives, establishing (i) a policy for the use of water resources with a view to developing the water business of the State, and (ii) plans, studies and projects related to the use of water resources, directly or by means of agreements with third parties.

Our main operating units have been granted water usage rights; however, we also have several operating units where water grants are not fully in place. To help obtain the remaining water grants, we have established a corporate program for the legalization and maintenance of grants.

In July 2000, the ANA was established to develop the National System for Water Resources Management. According to existing law, the hydrographic basin committees are authorized to collect charges related to water usage from users, such as us, for the abstraction of water from, or dumping of sewage into, bodies of water controlled by these agencies. We have paid R$69.1 million in charges to ANA and the State Secretariat of the

115 Environment (Secretaria Estadual de Meio Ambiente) since 2003, and these agencies have used the charges they have collected to pay for expenses related to the National System for the Management of Water Resources (Sistema Nacional de Gerenciamento de Recursos Hídricos) and principally to sponsor studies, programs, projects and constructions provided for in the Water Basin Plan (Plano de Bacia). Resources for these projects may be loaned or provided to governmental agencies and corporations, including us, for use in the conservation and recovery of water resources.

State Law No. 12,183, which was enacted on December 29, 2005, established the basis for the charges for the use of the water resources owned by the State of São Paulo. To apply such charges, the law provides for, among other provisions, the formulation of criteria by the basin committees, the creation of basin agencies and the organization of a registered list of water resource users. The basin committee’s proposals regarding the amounts to be charged at each basin must be approved by the State Water Resource Council, and formalized by a decree issued by the State Governor.

Water Quality

Administrative Rule No. 518/2004, issued by the Ministry of Health of the federal government, provides the standards for drinking water for human consumption in Brazil. This rule is similar to the U.S. Safe Drinking Water Act and the regulations enacted by the U.S. Environmental Protection Agency, which establishes rules for sampling and limits related to substances that are potentially hazardous to human health.

In compliance with Brazilian law, the physical-chemical, organic and bacteriological analyses carried out for water quality control follow the methodologies of the Standard Methods for Water and Wastewater (21st edition) of the American Water Works Association.

Decree No. 5,440/2005 provides that the quality of water must be disclosed to consumers. We have been complying with this regulation by publishing the required information in monthly bills and annual reports delivered to all consumers that we serve.

Environmental Regulation

The implementation and operation of water and sewage systems are subject to strict federal, state and municipal laws and regulations on environmental and water-resource protection. The National Environmental Council (Conselho Nacional de Meio Ambiental) (“CONAMA”) is the federal agency responsible for the regulation of potentially polluting activities. In the State of São Paulo, the Companhia Ambiental do Estado de São Paulo (“CETESB”) is the governmental entity responsible for the control, supervision, monitoring and licensing of polluting activities, pursuant to State Law No. 997 of 1976 and State Law No. 13,542 of 2009. CETESB regulates the control of environmental pollutants.

The control and environmental planning instruments are defined by several legal instruments, such as State Law No. 997/1976, which regulates the environmental pollution control; the Conama Resolution 05/1988, which requires licensing of sanitation projects that cause significant alterations to the environment; the Conama Resolution No. 237/1997, which regulates (i) environmental licenses, (ii) the federal, state and local jurisdiction over environmental issues, (iii) the list of activities subject to licensing; and (iv) environmental impact studies and reports; State Decree No. 47,400/2002 and related articles from State Law No. 9,509/1997 regarding environmental licensing; and State Decree No. 8,468/76 and Conama Resolution No. 357/2005, which establish the classification of bodies of water and related environmental guidelines, as well as effluent limitation guidelines, among other provisions.

116 Projects with significant environmental impact are subject to specific studies prepared by multidisciplinary teams that present a series of recommendations focused on minimizing the environmental impact. These studies are then submitted for analysis and approval by the government authorities. The licensing process is composed of three stages, including the following licenses:

 prior license – granted in the planning stage, approving the location and concept and attesting to the project’s environmental feasibility;

 installation license – authorizing the beginning of works for the installation of the project, subject to compliance with approved plans, programs and projects, including environmental control measures and other necessary technical requirements; and

 operation license – authorizing the operation of a unit or activity, subject to compliance with the technical requirements contained in the installation license.

Feasibility and environmental compliance analyses are included in each of the stages.

As of the date of this offering memorandum, we are not in possession of all licenses required in connection with our operations. We have established a program to obtain all necessary licenses in an effort to bring us into full compliance within five years. Our failure to obtain such licenses has resulted and may result in the future imposition of fines or penalties. With respect to new operations, our policy is to obtain all requisite licenses prior to commencement of such operations.

Sewage Requirements

State law sets forth regulations regarding pollution control and environmental preservation in the State of São Paulo. State law limits waste discharge that impacts the water, air and soil. State law provides that, in areas in which there exists a public sewage system, all effluents of a “polluting source” must be discharged to such system. It is the responsibility of the polluting source to connect itself to the public sewage system. All effluents to be discharged are required to meet certain criteria established by the applicable environmental law, which allows such effluents to be treated by our treatment facilities and discharged in an environmentally safe manner. Effluents that do not comply with such criteria are prohibited from being discharged into the public sewage system. State legislation also establishes that liquid effluents, except those related to basic sanitation, be subjected to pre-treatment so that they meet the required mandatory levels before being discharged into the public sewage system. National sanitation guidelines are also established in Article 45 of Federal Law No. 11,455/2007.

CETESB is authorized under State law to monitor discharges of pollutants into the environment and to enforce the requirements of State law. CETESB is responsible for issuing installation and operation licenses granted to sewage treatment facilities and other pollution sources.

We have a program aimed at cleaning up the Tietê river, called the Tietê Project, which was launched in 1992 and is considered the largest basic sanitation program ever implemented in Brazil. The Tietê Project is included in our capital expenditure program and involves work for the collection, removal and treatment of sewage to expand and optimize the basic sanitary sewage system in the São Paulo metropolitan region. See “—Capital Expenditure Programs—Metropolitan System Investment Program—Tietê Project”.

The disposal of sludge must also meet State and Federal Law requirements such as the Conama Resolution No. 375 enacted on August 29, 2006. CETESB also regulates the discharge of effluents into bodies of water and must approve all of our treatment facilities in accordance with federal and state regulations. State and federal water resource legislation establish the charging of fees for the discharge of treated effluents into bodies of water. This provision is already in force in relation to some water basins, and is in different stages of implementation in remaining basins.

117 Tariff Regulation in the State of São Paulo

The tariffs for our services are subject to Federal and State regulation.

On December 16, 1996, the governor of the State of São Paulo issued a decree which approved the existing tariff system and allowed us to continue to set our own tariffs. We used to set our tariffs based on the general objectives of maintaining our financial condition and preserving “social equality” in terms of the provision of water and sewage services to the population while providing a return on investment. The governor’s decree also directs us to apply the following criteria in determining our tariffs:

 category of use;

 capacity of the water meter;

 characteristics of consumption;

 volume consumed;

 fixed and floating costs;

 seasonal variations; and

 social and economic conditions of residential customers.

With the enactment of the Basic Sanitation Law and Federal Consortium Law, we are prohibited from planning, inspecting and regulating services, which includes determining the tariff policy to be adopted. Such activities are to be exercised by the ARSESP, the State entity that regulates the services, which, with the exception of the responsibility for planning, may delegate the exercise of the other applicable responsibilities.

Pursuant to the Basic Sanitation Law, tariff regulation is to be performed by an independent regulatory entity and tariffs shall be adjusted on an annual basis. Municipalities can choose to delegate tariff regulation to the ARSESP instead of creating their own regulatory agency. With the sole exception of the municipality of Lins, no other municipality has decided to create its own regulatory entity. Many municipalities have already delegated regulation to the ARSESP. As such, we believe that in the near future the ARSESP may be in charge of regulating tariffs for most of our concession and program agreements. Nonetheless, we cannot be certain that other municipalities will not take the same decision that the municipality of Lins has taken.

The current tariff structure maintains three different tariff schedules, depending upon whether a customer is located in the São Paulo metropolitan region or the Regional systems. There are four levels of volume consumed for each category of customer, except for the residential social and favelas (shantytowns). The residential social tariffs apply to residences of low income families, residences of persons unemployed for up to 12 months and collective living residences. The favela tariffs apply to residences in shantytowns characterized by a lack of urban infrastructure. The latter two sub categories were instituted to assist lower income customers by providing lower tariffs for consumption. Customers are billed on a monthly basis. Water and sewage bills are based upon water usage determined by monthly water meter readings. Larger customers, however, have their meters read every 15 days to avoid nonphysical losses resulting from faulty water meters. Sewage billing is included as part of the water bill and is based on the water meter reading. We are also authorized to enter into individual contracts with certain customers, such as municipalities, to supply water or sewage services on a wholesale basis.

Before the enactment of the Basic Sanitation Law in 2007, we were subject to a federal law which limited the return on assets for water and sewage services to 12% per annum. Return on our assets was calculated using operating income (before financial and certain other expenses) measured against our operational assets (property, plant and equipment and certain other assets), based on our financial statements prepared in accordance with Brazilian GAAP. The Basic Sanitation Law revoked this law and extinguished this rule. With respect to the criteria to calculate the return on assets, on July 30, 2010, the ARSESP adopted a new methodology for the calculation of

118 return on assets, which uses the replacement cost of the assets (assuming replacement with new assets) as a basis for the calculation. In April 2010, the ARSESP submitted for public comments a new methodology in view of a future tariff reform. Although the ARSESP has indicated that it will implement the new methodology by September 2011, we cannot assure you when the new rules will be enacted. Meanwhile, the ARSESP has not altered the tariff formula and has continued to apply the same methodology as in prior years. See “Risk Factors— Risks Relating to Our Business—We cannot anticipate the effects that further developments of the Basic Sanitation Law and its interpretation will have on the basic sanitation industry in Brazil and on us”.

Governmental Restrictions on Incurrence of Debt

On June 30, 1998, the Central Bank issued a resolution amending certain conditions that must be observed with respect to the external credit operations (i.e., foreign currency borrowings) of states, the Federal District of Brasilia, municipalities and their respective autarquias (agencies), foundations and non-financial companies, including us. This resolution provides, among other things, that, with certain exceptions applicable to the importation of goods and services:

 the proceeds of external credit operations must be exclusively used to refinance outstanding financial obligations of the borrower, with preference given to those obligations that have a higher cost and a shorter term, and, until used for such purposes, the proceeds shall remain deposited, as directed by the Central Bank, in a pledged account; and

 the total amount of the contractual obligation must be subject to monthly deposits in a pledged account, equal to the total debt service obligation, including principal and interest, divided by the number of months that the obligation is to be outstanding.

The Central Bank resolution further provides that the requirements described above do not apply to financing transactions involving multilateral or official organizations such as the IBRD, the IADB or the JICA. The Central Bank regulation implementing this resolution provides, among other things, that the account referred to in the first bullet point above must be an account opened in a federal financial institution, which is to hold such funds until released for the purpose of refinancing outstanding obligations of the borrower. The Central Bank regulation further provides that the account described in the second bullet point above must be an escrow account to be opened in a federal financial institution and to secure the payment of principal and interest on the external debt.

Our foreign currency-denominated transactions are also subject to the approval of the National Secretariat of Treasury (Secretaria do Tesouro Nacional) and the Central Bank. After reviewing the financial terms and conditions of the transaction, the National Secretariat of Treasury and the Central Bank will issue an approval for the closing of the foreign exchange transaction relating to the entry of the funds into Brazil and, following such entry and at our request, an electronic certificate of registration through which all scheduled payments of principal, interest and expenses will be remitted by us. The electronic certificate of registration grants the borrower access to the market for foreign exchange.

Lending Limits of Brazilian Financial Institutions

The National Monetary Council limits the amount that Brazilian public financial institutions may lend to public sector companies, such as us. Financing of projects which are put up for international bid and any financing in reais provided to the Brazilian counterpart of such international bids are excluded from these limits.

We are also subject to the provisions of National Monetary Council (Conselho Monetário Nacional) Resolution No. 2,827 of March 30, 2001, as amended, which limits the value of credit operations of financial institutions and other institutions authorized by the Central Bank with bodies and entities in the public sector.

Scope of Business

The Law of the State of São Paulo No. 12,292, dated of March 2, 2006, amended the Law of the State of São Paulo No. 119, dated of June 29, 1973, which created SABESP, authorized us to provide water and sewage

119 services outside São Paulo (in other States of Brazil and other countries). This law also authorized us to own interests in other public or private-public companies and Brazilian or international consortiums. In addition, this law permitted us to incorporate subsidiaries and enter into a partnership with or acquire interests in a private company with a corporate purpose related to the sanitation business.

120 MANAGEMENT

Directors and Senior Management

Under our by-laws and Brazilian Corporate Law, we are managed by our board of directors (Conselho de Administração), which currently consists of eleven directors, and a board of executive officers (Diretoria), which currently consists of six executive officers. The address for correspondence for both our board of directors and our board of executive officers is our principal executive office located at Rua Costa Carvalho, 300, 05429-000, São Paulo, SP, Brazil.

As our controlling shareholder, the State has the ability to control the election of our board of directors and, therefore, our direction and future operations. Upon the election of a new State governor and any resulting change in the administration of the State, all or some of the members of our board of directors, including our chairman, have historically been replaced by designees of the new administration. Our board of directors may in turn replace some or all of the executive officers. See “Risk Factors—Risks Relating to Our Control by the State of São Paulo—We are controlled by the State of São Paulo, whose interests may differ from ours or from minority shareholders’ interests, and which could have a material adverse effect on us”.

Board of Directors

Our by-laws provide for a minimum of five and a maximum of 15 directors. The members of our board of directors are elected at a general shareholders’ meeting to serve renewable two-year terms. Each member of our board of directors must be our shareholder under Brazilian Corporate Law. Pursuant to our by-laws, our employees have the option to elect one member of our board of directors. Currently, our employees have not elected a director. In addition, pursuant to Brazilian Corporate Law, at least one member of the board of directors of mixed capital companies, such as us, must be appointed by the minority shareholders. Finally, according to the Novo Mercado rules, at least 20% of the board of directors must be comprised of independent members.

The current members of our board of directors were elected in the general shareholders’ meeting held on April 29, 2010. The tenure of the directors will end upon the election of the new members at the general shareholders’ meeting to be held in April 2012. Currently, we have three directors considered independent under the Novo Mercado rules.

Our board of directors ordinarily meets once a month or when called by a majority of the directors or the chairman. Its responsibilities include the establishment of policy and general orientation of our business, and the appointment and supervision of our executive officers.

The following are the names, ages, position, date of election to current term and brief biographical descriptions of the current members of our board of directors:

Director Age Position Date Elected

Dilma Seli Pena 60 Chairperson April 29, 2010 Humberto Rodrigues da Silva 53 Director April 29, 2010 Alexander Bialer 63 Independent Director* April 29, 2010 Reinaldo Guerreiro 57 Independent Director* April 29, 2010 Roberto Yoshikazu Yamazaki 54 Director April 29, 2010 Manuelito Pereira Magalhães Júnior 42 Director April 29, 2010 Mario Engler Pinto Junior 54 Director April 29, 2010 Jerônimo Antunes 54 Independent Director* April 29, 2010 Gesner José de Oliveira Filho 54 Director April 29, 2010 Heraldo Gilberto de Oliveira 46 Director April 29, 2010 Stela Goldenstein 57 Director April 29, 2010

* These directors comply with the independence requirements established by the Novo Mercado rules.

121 Dilma Seli Pena. Ms. Pena has been the chairperson of our board of directors since January 2007. She holds a master’s degree in public administration from Escola de Administração de Empresas de São Paulo - Fundação Getúlio Vargas (“FGV”) and a degree in geography from Universidade de Brasília. In 1976, she began her career as a public servant working for the Research Institute of Applied Economics (Instituto de Pesquisa Econômica Aplicada) (“IPEA”). She was director of the sanitation division of the Urban Policy Secretariat of the Ministry of Planning Office (Secretaria de Política de Saneamento Urbano), director of the strategic investments division of the Ministry of Planning (Investimentos Estratégicos do Ministério de Planejamento) and director of the Brazilian National Water Agency (Agência Nacional de Águas). She was a deputy secretary of the Economics and Planning Secretariat of the São Paulo State government (Adjunta da Secretaria de Economia e Planejamento do Estado de São Paulo). She was an active member of the Environmental Board of the Industry Federation of the State of São Paulo (Conselho Ambiental da Federação das Indústrias do Estado de São Paulo). Since January 2007, she has been responsible for the State Secretariat of Sanitation and Energy and has been chairperson of the board of directors of the following companies owned by the State of São Paulo: SABESP, EMAE and CESP. She has published a number of articles, texts and books in the areas of sanitation, water resources and planning.

Humberto Rodrigues da Silva. Mr. Silva has been a member of our board of directors since January 2007. He holds a post-graduate degree in methodology and projects of municipal and urban development from Escola Nacional de Serviços Urbanos (“ENSUR”) and a post-graduate degree in hospital management from Universidade Federal da Bahia. He also holds a degree in public administration from FGV. Currently, he is the deputy secretary of the Political Affairs Department of the government of the State of São Paulo. He was the chief of the Secretariat of the city of São Paulo, of the Secretariat of Science, Technology and Economic Development of the State of São Paulo (Secretaria de Ciência, Tecnologia e Desenvolvimento Econômico do Estado de São Paulo) and also of the Companhia Metropolitana de Habitação de São Paulo (“COHAB”). From 1999 to 2004, he was a consultant and the director of planning and projects of the São Paulo Development Corporation. He has been a member of the board of directors of the Fundação Paula Souza, of the Instituto de Pesquisa Tecnológica de São Paulo and of the São Paulo Turismo S.A. (“SPTURIS”). He has also worked for the government of the State of Bahia and for the municipality of Camaçari.

Alexander Bialer. Mr. Bialer has been a member of our board of directors since April 2003. He holds a degree in mechanical engineering from Instituto Tecnológico da Aeronáutica—ITA and a specialization degree in systems administration from the FGV. He is the chairman the board of directors of GE Hydro Inepar. In addition, Mr. Bialer is a member of the advisory councils of GE Brasil Previdência, GE Celma, Synergy Group and Associação Brasileira de Infraestrutura e Indústrias de Base (“ABDIB”). He had previously worked with Avon, Máquinas Piratininga and ASEA. Mr. Bialer was a member of the board of directors of COPLEN S/A, CELMA Motores Elétricos S/A, GEVISA S/A, Inepar Eletrônica S/A, GE CELMA S/A, GE Dako S/A, GE VARIG S/A and GE Hydro Inepar S/A.

Reinaldo Guerreiro. Mr. Guerreiro has been a member of our board of directors since January 2007. He holds a PhD in accounting and controllership, a master’s degree in accounting and controllership and a bachelor’s degree in accounting sciences, all of them from the School of Economics, Business and Accounting at the University of São Paulo (Faculdade de Economia, Administração e Contabilidade da Universidade de São Paulo) (“FEA-USP”), where he is the vice-director of the Economy, Business and Accounting College. Mr. Guerreiro also headed the Department of Accounting and Actuarial Sciences at FEA-USP for many years. He was a corporate consultant for several international consultancy firms such as Roberto Dreyfuss Consultores, Klynveld Main Goerdeler Auditores S/C, Sérgio Bio, Splendore & Associados S/C Ltda. Consultores em Administração (“SBS”), Artur Young Consultores, Biedermann, Bordasch, Ernest & Whinney, Directa and BDO Consultores. He is also a consultant specialized in economic management. He has worked in many projects in the areas of economic management, costs, budgeting and information systems in several companies such as Grupo Zillo Lorenzetti, Grupo Feital, Construtora Mendes Junior, Starret Indústria e Comunicação, Companhia Municipal de Transporte Coletivo de Araucária (“CMTC”), Ferrovia Paulista S.A. (“FEPASA”), Companhia Siderúrgica Paulista (“COSIPA”), Mafersa S.A., Usina Santa Elisa, Gillete do Brasil, Hansen Máquinas e Equipamentos, Cipla Indústria do Lar, Metalúrgica Matarazzo, Elebra Informática, NEC do Brasil, Caixa Econômica Federal and Banco do Brasil.

Roberto Yoshikazu Yamazaki. Mr. Yamazaki has been a member of our board of directors since January 2007. He holds a degree in business administration. He currently acts as technical advisor of the Treasury Secretariat of the State of São Paulo (Secretaria do Fazenda do Estado de São Paulo). From 2006 to January 2007,

122 he was deputy secretary of the Treasury Secretariat of the State of São Paulo. From 2003 to 2006, he was coordinator of the financial administration of the Treasury Secretariat of the State of São Paulo. From 1997 to 2003, he was technical director of the State Treasury Department. From 1995 to 1997, he acted as technical assistant of the State Coordination of Financial Administration. From 1993 to 1994, he was advisor of the Secretariat of Education of the State of São Paulo. From 1992 to 1993, he was technical advisor of the Administrative and Financial Board of Executive Officers at Companhia de Entrepostos e Armazéns Gerais de São Paulo (“CEAGESP”). From 1976 to 1992, he was administrative and financial manager of Terrafoto S.A. – Atividades de Aerolevantamentos.

Manuelito Pereira Magalhães Júnior. Mr. Magalhães has been a member of our board of directors since January 2007. He holds a degree in economic sciences and a master’s degree in economic sciences from the Instituto de Economia, Universidade Estadual de Campinas (“UNICAMP”). He was a member of the board of directors of the Companhia de Engenharia de Tráfego de São Paulo (“CET-SP”), of the COHAB and, of the Empresa de Tecnologia de Informação e Comunicação de São Paulo (“PRODAM-SP”). He was a parliamentary advisor in the Federal Senate. From 1998 to 2002, he was the special advisor to the Minister of Health. From 2005 to 2006, he was the ombudsman of the National Supplementary Health Agency (“ANS”). From 2005 to 2006, he was the deputy secretary of the Planning Secretariat and the secretary of Planning of the Municipality of São Paulo. He was also the technical advisor, the secretary of finance and the director of the Department of Advisory, Planning and Management in the municipality of Campinas, State of São Paulo.

Mário Engler Pinto Junior. Mr. Engler has been a member of our board of directors since March 2006. He holds a law degree and a PhD degree in Commercial Law from the Faculdade de Direito at USP and is currently a law professor at FGV. Mr. Engler participated in the State Privatization Council (Conselho Estadual de Desestatização) (“PED”) and in the Public-Private Partnership Program of the State of São Paulo (Programa Estadual de Parcerias Público-Privadas). Mr. Engler has been a member of the Arbitration Panel of the BM&FBovespa (Câmara de Arbitragem do Mercado da Bolsa de Valores, Mercadorias e Futuros) since 2001 and a member of the board of directors of the CODEC (Conselho de Defesa dos Capitais do Estado) since 2002. Mr. Engler was the Chief Executive Officer for Companhia Paulista de Parcerias (“CPP”) and he was a member of the board of directors at CCP from 2004 to 2006. Mr. Engler was a member of the board of directors of Companhia do Metropolitano de São Paulo from 2004 to 2006. Since 2007, Mr. Engler has been responsible for the legal advisory department for the Secretariat of Treasury. Mr. Engler has been a member of the ARSESP for energy matters since 2008.

Jerônimo Antunes. Mr. Antunes has been a member of our board of directors since April 2008. He holds a master’s and PhD degree in controllership and accounting from the Universidade de São Paulo (São Paulo University) and holds a degree in Business Administration and Accounting. He has been a certified independent accountant and consultant in accountability and corporate finance since 1977. He has been a professor at FEA-USP since 1999, a professor of several MBA courses at the Fundação Instituto de Pesquisas Contábeis, Atuariais e Financeiras (“FIPECAFI”) since 2000, at FEA-USP, since 2000, and at FIA – Fundação Instituto de Administração, since 2006. He was a professor at the Universidade Federal do Ceará from 2000 to 2005 and in several other institutions. He was a director of FIPECAFI from 2000 to 2007. He was a board member and director of IBRACON from 1998 to 2006. He was a director of Associação Nacional dos Executivos de Finanças, Administração e Contabilidade (“ANEFAC”) from 1994 to 2000.

Gesner José de Oliveira Filho. Mr. Oliveira Filho has been a member of our board of directors since July 2008 and our chief executive officer since January 2007. He holds a PhD in economics from the University of California, Berkeley, a master’s degree in economics from UNICAMP and a bachelor’s degree in economics from FEA-USP. From 1996 to 2000, he was the chairman of the Administrative Council of Economic Protection (Conselho Administrativo de Defesa Econômica) (“CADE”). From 1993 to 1995, he was the deputy secretary of the Secretariat of the Economic Policy of the Ministry of Finance. In 1995, he was the interim secretary of the economic monitoring department of the Ministry of Finance. He was also the managing partner of Tendências Consultoria Integrada, a consultant and an arbitrator in the areas of regulation of infrastructure and antitrust, the chairman of the Instituto Tendências de Direito e Economia and a member of several boards of directors of private institutions. Additionally, Mr. Oliveira Filho was a professor in the Economics Department at FGV and Visiting Professor of the Center for Brazilian Studies of Columbia University (USA). Mr. Oliveira Filho was awarded the

123 2009 Citizenship’s Award – category “Environmentalist Entrepreneur” by Pensamento Nacional das Bases Empresariais (“PNBE”).

Heraldo Gilberto de Oliveira. Mr. Oliveira has been a member of our board of directors since November 2009. He holds a degree in accounting and a degree in business administration. He also holds a master of controllership and accounting from FEA-USP. Mr. de Oliveira is a professor of Capital Markets and Investor Relations in the specialization and in the MBA courses at FIPECAFI. Mr. Oliveira is a partner at FCO Consultores Associados and works as an accounting and financial expert consultant. He worked for ten years as an independent accountant. Mr. Oliveira was a member of the board of directors and the coordinator of the audit committee of Banco Nossa Caixa S/A from 2007 to August 2009 and since September 2009 has been the coordinator of the audit committee of Banco Industrial e Comercial S/A (“BICBANCO”). He is a director of the Instituto de Executivos em Finanças of São Paulo since September 2009.

Stela Goldenstein. Mrs. Goldenstein has been a member of our board of directors since April 2010. She holds a degree in geography with specialization in Urban Planning from Universidade de São Paulo (University of São Paulo). She is an advisor to the Empresa Metropolitana de Planejamento (“EMPLASA”) and to Governor Alberto Goldman. Ms. Goldenstein has held public positions since 1975, with the definition of sector and environmental policies and strategic planning for the State government. She has held several positions, such as Advisor to Governor José Serra, Assistant Secretary of Mayor Gilberto Kassab (2001-2002), Environment Secretary of the city of São Paulo (2001-2002), Special Advisor to Governor Mario Covas (1999-2000), and São Paulo State Environment Secretary (1998-1999). She was also a member of the Board of Directors of the Empresa de Tecnologia de Informação e Comunicação Municipal de São Paulo (“PRODAM”) and of São Paulo Transportes (“SPTrans”) (2006-2009), Chairman of the Board of Directors of Companhia Ambiental do Estado de São Paulo (“CETESB”) (1998-2000), a member of our Board of Directors (1995-2001) and a member of the Board of Directors of Companhia Metropolitana de Habitação de São Paulo (“COHAB-SP”) (1989-1990).

Board of Executive Officers

Our board of executive officers is composed of six executive officers appointed by our board of directors for renewable two-year terms. Our executive officers are responsible for all matters concerning our day-to-day management and operations. Members of our board of executive officers have individual responsibilities established by our board of directors and our by-laws.

The following are the names, ages, position, date of election to current term and brief biographical descriptions of our board of executive officers:

Executive Officer Age Position Date Elected

Gesner José de Oliveira Filho 54 Chief Executive Officer June 18, 2009 Marcio Saba Abud 53 Corporate Management Officer June 18, 2009 Rui de Britto Álvares Affonso 53 Chief Financial Officer and Investor June 18, 2009 Relations Officer Paulo Massato Yoshimoto 58 Metropolitan Region Officer June 18, 2009 Umberto Cidade Semeghini 61 Regional Systems Officer June 18, 2009 Marcelo Salles Holanda de Freitas 54 Technology, Enterprises and Environment June 18, 2009 Officer

Gesner José de Oliveira Filho. See “—Board of Directors” above.

Marcio Saba Abud. Mr. Abud has been our corporate management officer since January 2007. He holds a degree in Economic Sciences from FEA-USP. He has broad experience in the financial area and in various segments of the domestic and international markets, such as treasury, capital markets, domestic and international structured operations and management of international securities and note issue programs. He also has experience in foreign trade financing, investment fund creation and management, corporate customer service, and establishment and management of credit lines. He worked at Unibanco from March 1980 to August 1984, at Banco Boavista from March 1985 to October 1986 and at Banco WestLB do Brasil S.A. from April 1987 to January 2007.

124 Rui de Britto Álvares Affonso. Mr. Affonso has been our chief financial officer and investor relations officer since July 2003. Mr. Affonso holds a PhD and a master’s degree in economics from UNICAMP and a degree in economics from USP. He has been a professor at UNICAMP since 1986, a professor at FEA-USP from 1983 to 1999 and a director of public economy at the Fundação do Desenvolvimento Administrativo from 1994 to 2003. He also represented Brazil on the board of the Forum of Federations (a non-governmental entity based in Canada) from 2000 to 2006. Mr. Affonso has also held several positions in the State government.

Paulo Massato Yoshimoto. Mr. Yoshimoto has been our metropolitan region officer since February 2004. He holds a degree in civil engineering from Escola de Engenharia de Lins. Mr. Yoshimoto has been working with us since 1983, and has held the following positions: executive assistant to the operations office and head of water production and maintenance and metropolitan planning and development departments. Mr. Yoshimoto has also held a number of different positions at the Empresa Metropolitana de Planejamento from 1975 to 1983.

Umberto Cidade Semeghini. Mr. Semeghini has been our regional systems officer since January 2007. He holds a degree in electrical engineering from the Faculdade de Engenharia Industrial. He was secretary of planning of the Ministry of Transport and the executive officer of Gerentec Engenharia. He has experience in the operation of systems, consulting services in the development of studies and projects for water supply and sanitary sewage systems, highway systems and, through partnerships with domestic and foreign companies, development of economic engineering studies (i.e., definition of tariff structures for public services).

Marcelo Salles Holanda de Freitas. Mr. Freitas has been our technology, enterprises and environment officer since January 2007. He holds a degree in civil engineering and a post-graduate degree in sanitation from the Escola Politécnica at USP. He also has a specialization degree in business administration from the Instituto Brasileiro do Mercado de Capitais. He is a regular member of some of the most important institutions and associations of the sanitation and environment market. He was our vice-chairman for the interior and for the metropolitan region. He was the executive officer of projects of Ondeo Services do Brasil, executive officer of sanitation of Suez Ambiental, chief executive officer of Águas do Amazonas and executive officer of the sanitation services of Etep Consultoria, Gerenciamento e Serviços.

Fiscal Council (Conselho Fiscal)

Our fiscal council, which is established on a permanent basis and generally meets once a month, consists of five members and five alternates. The current members of our fiscal council were elected in the shareholders’ meeting held on April 29, 2010. Their tenure will end in April 2011. The primary responsibility of the fiscal council, which is independent from management and from the external auditors appointed by our board of directors, is to review our consolidated financial statements and report on them to our shareholders.

The following are the current members and alternate members of our fiscal council:

Fiscal Council Member Age Position Date Elected

Sandra Maria Giannella 54 Fiscal Council Member April 29, 2010 Alexandre Luiz Oliveira de Toledo 51 Fiscal Council Member April 29, 2010 Maria de Fátima Alves Ferreira 50 Fiscal Council Member April 29, 2010 Emilia Ticami 54 Fiscal Council Member April 29, 2010 Deraldo de Souza Mesquita Junior 51 Fiscal Council Member April 29, 2010 Vanildo Rolando Neubauer 56 Alternate Fiscal Council April 29, 2010 Member Cassio Martins Camargo Penteado Junior 63 Alternate Fiscal Council April 29, 2010 Member José Rubens Gozzo Pereira 63 Alternate Fiscal Council April 29, 2010 Member Tomás Bruginski de Paula 49 Alternate Fiscal Council April 29, 2010 Member Joaldir Reynaldo Machado 61 Alternate Fiscal Council April 29, 2010 Member

125 Audit Committee

Our by-laws provide for an audit committee to be comprised of three board members, who shall cumulatively comply with the requirements of (i) independence; (ii) technical expertise; and (iii) identifying and complying with applicable exemptions in accordance with the Securities and Exchange Commission (“SEC”) and New York Stock Exchange (“NYSE”) rules. The members are appointed by the board of directors.

The audit committee is responsible for assisting and advising the board of directors in its responsibilities to ensure the quality, transparency and integrity of the Company’s published financial information. To this end, the audit committee supervises all matters relating to accounting, internal controls and internal and independent audit functions. The audit committee and its members have no decision making powers or executive functions.

The minimum availability required from each member of the audit committee is thirty hours per month. Under our by-laws, the members shall exercise their roles for the same period as their corresponding term of office, or until otherwise determined pursuant to a resolution passed at a general meeting of the shareholders or by a resolution of the board of directors.

The table below sets forth the members of the board of directors appointed to serve on our audit committee:

Director Position Date Elected

Jerônimo Antunes Coordinator and Financial Expert May 13, 2010 Reinaldo Guerreiro Member May 13, 2010 Heraldo Gilberto de Oliveira Member May 13, 2010

Compensation

Pursuant to Brazilian Corporate Law, our shareholders are responsible for establishing the aggregate amount of compensation we pay to the members of our board of directors, members of our fiscal council and our executive officers. According to Instruction No. 480 issued by the CVM, we have to periodically disclose certain information on individual compensation, such as averages and fringe benefits.

For the year ended December 31, 2009, the aggregate compensation, including benefits in kind granted that we paid to members of our board of directors and to our executive officers for services in all capacities was R$2.6 million. For the nine months ended September 30, 2010, the aggregate compensation, including benefits in kind granted that we paid to members of our board of directors and to our executive officers for services in all capacities was R$1.5 million.

Board Practices

The members of our board of directors are elected at a general shareholders’ meeting to serve renewable two-year terms. Our board of directors ordinarily meets once a month or when called by a majority of the directors or the chairman. See “―Directors and Senior Management—Board of Directors”.

Our board of executive officers is composed of six executive officers appointed by our board of directors for renewable two-year terms. Meetings of our board of executive officers are held weekly in the case of ordinary meetings or when called by the chief executive officer in the case of special or extraordinary meetings. See “— Directors and Senior Management—Board of Executive Officers”.

None of our directors and/or executive officers is a party to an employment contract providing for benefits upon termination of employment. Those directors and officers who are also our employees will remain as our employees after their tenure as directors and/or officers, in this case, maintaining all benefits granted to our employees.

126 Share Ownership

As of November 9, 2010, the members of the board of directors and the executive officers owned an aggregate of 5,210 common shares. The members of our board of directors and our executive officers, on an individual basis and as a group, beneficially own less than 0.1% of our common shares. See “Principal Shareholders and Related Party Transactions—Major Shareholder” for more information. As of that date, none of our directors and executive officers owned any stock options in respect of our common shares.

127 PRINCIPAL SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Major Shareholder

Our outstanding capital stock as of September 30, 2010, consisted of 227,836,623 common shares, without par value. Under our by-laws and the State laws, the State is required to own at least one-half plus one of our outstanding common shares. All of our shareholders, including the State, have the same voting rights.

The following table sets forth ownership information for each of our shareholders that beneficially owned 5.0% or more of our common shares and for our officers and directors, individually and as a group, as of September 30, 2010.

Common shares Shares %

State of São Paulo...... 114,508,085 50.3% Directors and executive officers of SABESP(1) ...... 5,210 0.0% Others ...... 113,323,328 49.7% Total(2) ...... 227,836,623 100.0%

(1) Our directors and executive officers collectively own less than 0.1% of our outstanding common shares. (2) As of September 30, 2010, 23.3% of our outstanding common shares were held by 2,846 registered shareholders in Brazil.

Related Party Transactions

Transactions with the State of São Paulo

We have entered into extensive transactions with the State, which is our controlling shareholder, and we expect to continue to do so. The State is our largest customer. It owns some of the facilities that we use in our business, it is one of the government entities that regulates our business, and it has assisted us in obtaining financing on favorable terms.

Many of our transactions with the State reflect policies of the State that depend on decisions of elected officials or public servants, and are accordingly subject to change. Among the practices that could change are those described below concerning the provision of State guarantees, and the terms on which we use State-owned reservoirs.

Provision of Services

We provide water and sewage services to the federal government, state and municipal governments and government entities in the ordinary course of our business. Sales of water and sewage services to the State, including State entities, totaled R$335.8 million, R$343.6 million, R$358.3 million, R$263.2 million and R$296.7 million in 2007, 2008, 2009 and in the nine months ended September 30, 2009 and 2010, respectively. Our accounts receivable from the State for water supply and sewage services totaled R$446.4 million, R$234.3 million, R$169.5 million and R$179.4 million, as of December 31, 2007, 2008, 2009, and September 30, 2010, respectively. In addition, as required by law, we invest our cash and cash equivalents with government financial institutions in short- term securities.

Payment of Pensions

Pursuant to a law enacted by the State, certain former employees of some State-owned companies that provided services to us in the past and later merged to form SABESP acquired a legal right to receive supplemental pension benefit payments. These rights are referred to as “Plan G0”. These amounts are paid by us, on behalf of the State, and are claimed by us as reimbursements from the State, as primary obligor. In 2007, 2008 and 2009, we made payments to former employees of R$104.6 million, R$110.8 million and R$116.1 million, respectively, in respect of Plan G0 and in the nine months ended September 30, 2009 and 2010, we made payments to former employees of R$79.3 million and R$81.3 million, respectively in respect of Plan G0. The State made

128 reimbursements in 2008 and 2009 and in the nine months ended September 30, 2009 and 2010 in the amounts of R$3.8 million, R$107.6 million, R$91.7 million and R$71.8 million, respectively.

Agreements with the State

In September 1997, we and the State entered into a memorandum of understanding providing that we would, in effect, apply dividends we declared that were otherwise payable to the State to offset accounts receivable in connection with the provision of water and sewage services to the State and its controlled entities.

On December 11, 2001, we entered into an agreement with the State and the DAEE. Pursuant to this agreement, the State acknowledged and agreed, subject to an audit by a State-appointed auditor, to pay us amounts it owed to us in respect of:

 water and sewage services we provided to governmental agencies, State-owned autonomous entities and foundations through December 1, 2001, and that was not offset in accordance with the September 1997 memorandum of understanding, in the total amount of R$358.2 million. This amount was renegotiated and included in the second amendment to this agreement discussed below; and

 supplemental retirement and pension benefits we paid from March 1986 to November 2001 on behalf of the State to former employees of the State-owned companies which merged to form SABESP; as we did not reach an agreement regarding these amounts, a joint inquiry has commenced in order to ensure agreement between us and the State, in the total amount of R$320.6 million. This amount was renegotiated and included in the third amendment to this agreement discussed below.

The agreement provided that the DAEE would transfer to us ownership of the Taiaçupeba, Jundiaí, Biritiba, Paraitinga and Ponte Nova reservoirs (hereinafter referred to as the “reservoirs”) which form the Alto Tietê system, and that the fair value of these assets would reduce the amounts owed to us by the State.

Pursuant to the December 2001 agreement, in 2002, a State-owned construction company (Companhia Paulista de Obras e Serviços) (“CPOS”), on behalf of the State, and an independent appraisal firm (Engenharia de Avaliações) (“ENGEVAL”), on our behalf, presented their valuation reports relating to the reservoirs. Under the agreement, the arithmetic average of these appraisals is deemed the fair value of the reservoirs. The appraisals contained in these reports were in the amounts of R$335.8 million and R$341.2 million, respectively. Because we had already made investments in the reservoirs by then, the arithmetic average of the appraisals submitted to our board of directors in August 2002, R$300.9 million, was net of a percentage corresponding to our investments. Our board of directors approved the valuation reports.

Under the December 2001 agreement, for amounts due in excess of the fair value of the reservoirs, the State is to make payments in 114 consecutive monthly installments. The nominal amount owed by the State will not be indexed to inflation or earn interest if there is a delay in concluding the appraisal of fair value. The installments will be indexed on a monthly basis by the IGP-M index, plus 6.0% per year, starting on the date the first installment becomes due.

On October 29, 2003, the Public Prosecution Office of the State of São Paulo (Ministério Público do Estado de São Paulo), on behalf of the people of the State, brought a civil public action in a trial court of the State of São Paulo (12a Vara da Fazenda Pública do Estado de São Paulo) alleging that a transfer to us of ownership of the reservoirs from the DAEE would be illegal. An injunction against the transfer of ownership of the reservoirs was granted, but was later reversed. However, in October 2004, the court of first instance handed down its judgment on the civil public action and declared the agreement between SABESP, DAEE and the State of São Paulo null and void. This decision was suspended and SABESP, the State Treasury and DAEE appealed the decision. On August 23, 2010, the appeal was denied. We have petitioned for clarification of the appeal court’s decision and will seek to take the case to the Supreme Court. The effects of the appeal court’s decision will be suspended until the end of the legal process. Our legal counsel has assessed the risk of loss as probable, which would prohibit the transfer of the reservoirs in payment of the accounts receivable due from the State.

129 The December 2001 agreement also provided that the legal advisors of the State would carry out specific analyses, which have commenced, to ensure agreement among the parties as to the methodology employed in determining the amount of reimbursement for pension benefits owed to us by the State. The commencement of payments with respect to pension amounts owed to us by the State has been postponed until these analyses are completed, the appraisal report is approved and the credit assignments relating to the transfer of the reservoirs are formalized. As discussed above, the transfer of the reservoirs is currently being disputed, and we are not certain whether the transfer will be legally permitted. Under the December 2001 agreement, the first payment was to be made in July 2002.

On March 22, 2004, we and the State entered into a first amendment to the December 2001 agreement. Under this amendment, the State acknowledged that it owed R$581.8 million to us relating to unpaid accounts receivable from the State through February 29, 2004, and we acknowledged that we owed an aggregate amount of R$518.7 million to the State as dividends, in the form of interest on shareholders’ equity. Accordingly, we and the State agreed to offset each other’s credit up to the limit of R$404.9 million, which was an amount adjusted up to February 2004. The outstanding balance of R$176.9 million (as of February 29, 2004) of the State’s consolidated debt was due to be paid in consecutive monthly installments from May 2005 through April 2009. These installments were to be indexed according to the IPCA index, plus an interest rate of 0.5% per month. Upon the execution of the first amendment, part of the debt that the State owed to us for the use of water and sewage services through February 2004 was offset by the debt that we owed to the State as dividends, in the form of interest on shareholders’ equity. The outstanding balance of R$113.8 million as dividends in the form of interest on shareholders’ equity that we owed to the State was netted against accounts overdue after February 2004. The first amendment did not amend the provisions of the December 2001 agreement regarding the supplemental retirement and pension benefits we paid from March 1986 to November 2001 on behalf of the State to former employees of the State-owned companies.

On December 28, 2007, we and the State entered into a second amendment to the December 2001 agreement, pursuant to which the State agreed to pay (i) the outstanding balance under the first amendment, in the amount of R$133.7 million (as of November 30, 2007), in 60 consecutive monthly installments, beginning on January 2, 2008; and (ii) the amount of R$236.1 million relating to part of the accounts overdue and unpaid from March 2004 through October 2007 regarding the provision of water supply and sewage collection services. As part of this amendment, we agreed to pay during the period from January through March 2008 the outstanding balance of dividends in the amount of R$400.8 million, in the form of interest on shareholders’ equity, due from March 2004 through December 2006. We paid these amounts as agreed. Under the second amendment, dividends payable by us are no longer required to be applied to offset accounts receivable from the State, and as a result, we are currently unable to determine the amount, if any, of the declared dividends that the State will apply to current and future accounts receivable owed to us by the State or its entities. In addition, pursuant to the second amendment, we and the State agreed on complying with certain mutual obligations relating (i) to the improvement of payment processes and budget management procedures; (ii) the rationalization of the use of water and the amount of water and sewage bills under the responsibility of the State; (iii) the recording of government entities with accounts overdue in a delinquency system or reference file; and (iv) the possibility of interrupting water supply to these entities in case of non-payment of water and sewage bills. We have not made any provisions for amounts due to us by the State because we expect to recover these amounts and we do not consider net losses probable. Finally, this second amendment did not amend the provisions of the December 2001 agreement regarding the supplemental retirement and pension benefits we paid from March 1986 through November 2001 on behalf of the State to former employees of the State-owned companies that merged to form SABESP.

On March 26, 2008, we entered into a commitment agreement (termo de compromisso) with the State with the purpose of finding an alternate solution to the deadlock related to the amount owed by the State to us in connection with the supplemental retirement and pension benefits we paid from March 1986 through November 2001 on behalf of the State to former employees of the State-owned companies that merged to form SABESP. In this agreement, the Company and the State committed to hiring specialized companies to carry out new valuations of the amounts owed to us by the State and of the reservoirs. An independent consulting firm, FIPECAFI, has been retained to resolve the disagreement and validate the amount we paid from March 1986 through November 2001 on behalf of the State to former employees of the State-owned companies that merged to form SABESP, which the State has not yet agreed to reimburse us, hereinafter referred to as the “Disputed Reimbursement Amount”. In addition, FIPECAFI is performing, together with another independent consulting firm, a new valuation of the reservoirs that might be transferred to us as amortization of the reimbursement payable by the State to us.

130 On November 17, 2008, we, the State and DAEE entered into a third amendment to the December 2001 agreement, pursuant to which the State recognized a debt balance payable to SABESP totaling R$915.3 million, hereinafter referred to as the “Undisputed Reimbursement Amount”, as adjusted based on the IPCA. We accepted on a provisional basis the reservoirs as part of the payment of the Undisputed Reimbursement Amount and offered to the State a provisional settlement, recognizing a credit totaling R$696.3 million, corresponding to the value of the reservoirs located in the Alto Tietê region. We and the State have agreed that the final offset will only be recorded when the effective transfer of the reservoirs is recorded at the Real Estate Registry. The outstanding balance of the Undisputed Reimbursement Amount, amounting to R$219.0 million, is being paid by the State in 114 consecutive monthly installments, as adjusted by the annual IPCA variation, plus interest accruing at the annual rate of 6%. The first installment was paid in November 2008.

In addition to the Undisputed Reimbursement Amount, there is an outstanding balance relating to the Disputed Reimbursement Amount. As of September 30, 2010, the Disputed Reimbursement Amount amounted to R$510.3 million, in respect of which we had recorded a provision due to the current stage of negotiation with the State and uncertainty regarding its recovery. See Note 5 to our consolidated financial statements as of September 30, 2010 and for the nine months ended September 30, 2010 and 2009 regarding the Disputed Reimbursement Amount. We and the State have agreed that the dispute relating to the Disputed Reimbursement Amount will not prevent us from carrying out the commitments made in the December 2001 agreement. We are working with the State government to obtain legislative authorization to transfer the reservoirs to SABESP.

In addition, the third amendment to the December 2001 agreement provides for the regularization of the monthly flow of benefits. While we are liable for the monthly flow of benefits to the former employees of the state- owned companies that merged to form SABESP, the State shall reimburse us based on criteria identical to those applied when determining the Undisputed Reimbursement Amount. Should there be no preventive court decision, the State will assume the flow of monthly payment of benefits portion deemed as undisputed.

Finally, the third amendment to the December 2001 agreement established that the Public Attorney’s Office of the State of São Paulo (the “Public Attorney’s Office”) would issue a revised interpretation of the calculation and eligibility criteria applicable to the Disputed Reimbursement Amount. At that time, we believed that the Public Attorney’s Office would issue a revised interpretation which would have helped us bring the negotiations with the State to a conclusion. However, contrary to our expectations, the Public Attorney’s Office’s recent interpretation of the calculation and eligibility criteria applicable to the Disputed Reimbursement Amount refuted the reimbursement of the largest portion of this amount. As of September 30, 2010, we had made a provision of R$510.3 million in our accounts receivable from related parties in respect of the Disputed Reimbursement Amount.

Even though the negotiations with the State are still progressing, we cannot assure you that we will recover the receivables related to the Disputed Reimbursement Amount.

We will not waive the receivables from the State to which we consider ourselves to be legally entitled. Accordingly, we will take all possible actions to resolve the issue at all administrative and court levels. Should this conflict persist, we will take all the necessary actions to protect our interests. On March 24, 2010, we sent to the controlling shareholder the official letter approved by our executive committee, proposing that the matter be discussed at the São Paulo Stock Exchange (BM&FBovespa) Arbitration Chamber.

On November 25, 2010, we received an official letter from the CVM requesting certain information relating to our agreement with the State in respect of supplemental retirement and pension benefits we have paid on behalf of the State and to our accounting treatment during the years ended December 31, 2006, 2007 and 2008 of reimbursements due from the State with respect thereto.

Agreement with the State and the City of São Paulo

On June 23, 2010 the State and the city of São Paulo entered into a convention (convênio) with the intermediation and consent of SABESP and of the ARSESP pursuant to which they agreed to jointly manage the planning of and investment in the basic sanitation system of the city of São Paulo, among other things. This agreement established that the State and the city of São Paulo would enter into an agreement with us, granting us exclusive rights in the provision of water and sewage services in the city of São Paulo. In addition, the agreement

131 established the role of the ARSESP in regulating and overseeing our activities, and established a management committee that will be responsible for planning water and sewage services and for reviewing our investment plans. The management committee is composed of six members appointed for renewable two-year terms. The State and the city of São Paulo have the right to appoint three members each. We are permitted to participate in the meetings of the management committee, but we are not afforded any voting rights.

On June 23, 2010, we entered into a formal agreement with the State and the city of São Paulo to regulate the provision of water and sewage services in the city of São Paulo for a 30-year period, which may be extended for an additional 30-year period. Municipal Law No. 14,934/2009 authorized the city of São Paulo to enter into the agreement with us. The agreement establishes, among other things, how specific amounts of gross revenues from the services we render should be allocated (after deduction of Cofins and Pasep). Pursuant to the agreement, we are required to (i) invest at least 13.0% of the gross revenues we obtain from this agreement in the improvement of water and sewage infrastructure in the city of São Paulo; and (ii) contribute 7.5% of the gross revenues we obtain from this agreement to the São Paulo Municipal Sanitation Fund. In addition, the agreement provides that the ARSESP, the State agency responsible for regulating the basic sanitation industry, will ensure that the tariffs charged (a) will adequately compensate us for the services we provide; and (b) can be adjusted to restore the original balance between each party’s obligation and economic gain (equilíbrio econômico-financeiro). See “Business— Our Operation—Operations in the city of São Paulo and certain metropolitan regions”.

Dividends

We regularly pay dividends to our shareholders, including the State of São Paulo. In the past, we have withheld part of the dividends to which the State was entitled in order to offset it against our pending receivables from the State.

In accordance with our agreements with the State, we do not anticipate that we will withhold dividends to which the State is entitled in order to offset them against our pending receivables from the State in the near future.

Cash and Cash Equivalents

Our cash and cash equivalents invested with State financial institutions in short-term securities amounted to R$392.0 million, R$544.0 million and R$671.1 million, as of December 31, 2007, 2008 and 2009, respectively, and R$336.2 million and R$1,296.6 million as of September 30, 2009 and 2010, respectively. Interest income from these investments totaled R$51.5 million in 2007, R$62.2 million in 2008, R$73.9 million in 2009 and R$62.4 million and R$89.7 million for the nine months ended September 30, 2009 and 2010, respectively.

Government Guarantees of Financing

In some situations, the federal government, the State or government agencies guarantee our performance under debt- and project-related agreements.

The State has also guaranteed a portion of our repayment obligations under loan agreements that we entered into with the federal government in 1994 through its financial agent, Banco do Brasil S.A., which totaled R$1,215.9 million as of September 30, 2010. Furthermore, the federal government has guaranteed, and the State has provided a counter-guarantee, in respect of the financial agreements we entered into with the IADB in 1992 and 2000 for the total original aggregate amount of US$650.0 million related to the financing of the Tietê River recovery project to reduce pollution. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness Financing.”

On August 6, 2004, we entered into a credit agreement with the JICA for the financing of the Clean Wave Program for the Baixada Santista metropolitan region, which was guaranteed by the federal government, with a counter-guarantee from the State of São Paulo, for an aggregate principal amount of R$337.7 million.

In addition, we are currently negotiating with Caixa Econômica Federal for additional loans to finance portions of our capital expenditure program.

132 Use of State-Owned Reservoirs

We currently use the Guarapiranga and Billings reservoirs which are owned by another company controlled by the State, based on a grant issued by the DAEE. We do not pay any fees with respect to the use of these reservoirs. We are, however, responsible for maintaining them and funding their operating costs. The State incurs no operating costs on our behalf. If these facilities were not available for our use, we would have to obtain water from more distant sources, which would be more costly.

Agreements with Lower Tariffs

We have entered into agreements with public entities, including State entities and municipalities, which manage approximately 7,000 properties. Under these agreements, these public entities pay a different tariff which is approximately 25.0% lower than the tariff that applies for the public entities that have not entered into these agreements, provided such entities implement our PURA program for the rational use of water, which includes a reduction of at least 10.0% in water consumption. These agreements are valid for a 12-month term with automatic renewal for equal periods. Pursuant to the terms of these agreements, if these entities fail to make any payment on a timely basis to us, we have the right to cancel the agreement, thereby revoking the 25.0% tariff reduction.

Personnel Assignment Agreement Among Entities Related to the State Government

We have personnel assignment agreements with entities related to the State government, under which the expenses are fully passed on and monetarily reimbursed. The expenses related to personnel assigned by us to other State government entities in 2007, 2008 and 2009 amounted to R$3.9 million, R$5.5 million and R$5.4 million, respectively. The expenses related to personnel assigned by us to other State government entities in each of the nine months ended September 30, 2009 and 2010 amounted to R$3.6 million and R$4.1 million, respectively.

The expenses related to personnel assigned by other entities to us totaled R$0.1 million, R$1.3 million and R$ 0.3 million in 2007, 2008 and 2009, respectively. The expenses related to personnel assigned by other entities to us totaled R$0.2 million in each of the nine months ended September 30, 2009 and 2010.

Services Obtained from State Government Entities

As of September 30, 2010, we had an outstanding amount payable of R$9.8 million for services rendered by São Paulo State government entities, including the supply of electric power by CESP.

Non-operating Assets

We lend land, free of charge, to associations, support entities, non-governmental organizations and to DAEE, among others. Such non-operating assets totaled R$26.5 million as of each of December 31, 2007, 2008 and 2009 and R$25.4 million as of September 30, 2010, of which R$2.3 million was lent to DAEE as of each of December 31, 2007, 2008 and 2009 and September 30, 2010.

Transactions with SABESPREV Pension Fund

SABESPREV is the funded pension plan that we established to provide our employees with retirement and pension benefits. The assets of SABESPREV are independently held, but we nominate 50.0% of the directors of SABESPREV, including the chairman of the board, who has the deciding vote pursuant to the applicable legislation. Both we and our employees make contributions to the pension plan. We contributed R$11.9 million, R$12.5 million, R$12.9 million, R$9.2 million and R$10.9 million in 2007, 2008 and 2009 and in the nine months ended September 30, 2009 and 2010, respectively. On May 29, 2001, a federal law was enacted which, among other provisions, limits the amount mixed capital companies, like us, may contribute to their pension plans. Specifically, the ordinary contributions made by us to our pension plans may not exceed the contributions made by the beneficiaries of these plans. Studies have been undertaken in order to cure the deficit with respect to the current plan and transform it into a defined contribution plan.

133 Compensation of Management

The compensation paid by us to the members of our board of directors and officers amounted to R$2.4 million, R$2.4 million and R$2.6 million in 2007, 2008 and 2009, respectively, and R$1.8 million and R$1.8 million in the nine months ended September 30, 2009 and 2010, respectively. An additional amount of R$2.5 million, related to the bonus program, was accrued in 2007, 2008, 2009 and the nine months ended September 30, 2010.

134 DESCRIPTION OF THE NOTES

General

The notes will be issued pursuant to an indenture dated as of December 16, 2010 between the Company and Deutsche Bank Trust Company Americas, as trustee (the “Trustee”). The summary of certain provisions of the indenture set forth below does not purport to be complete and is qualified in its entirety by reference to all of the provisions of the indenture and the notes. Capitalized terms not otherwise defined herein have the meanings specified in the indenture. Whenever sections or defined terms of the indenture are referred to, such sections or defined terms are hereby incorporated herein by such reference.

The notes will be initially issued in an aggregate original principal amount of U.S.$350.0 million. The notes will mature on December 16, 2020 and will be payable at 100% of the principal amount thereof. The notes will bear interest from the Closing Date at the rate of 6.250% per annum.

Interest on the notes will be payable semiannually in arrears on June 16 and December 16 of each year (each, an “Interest Payment Date”) commencing on June 16, 2011, to the holders of record at the close of business on June 1 or December 1 (whether or not a business day), as the case may be, preceding such Interest Payment Date (each, a “Regular Record Date”), except for the final payment of principal and interest, which will be made against presentation of the notes.

The Company will pay interest on overdue principal and, to the extent permitted by applicable law, on overdue installments of interest, at 1.00% per annum in excess of the rate otherwise payable on the notes. Interest will be computed on the basis of a 360-day year of twelve 30-day months.

Additional Notes

An aggregate principal amount of notes equal to U.S.$350.0 million is being issued in this offering. The indenture provides that upon satisfaction of certain conditions, the Company may (without the consent of the noteholders) issue additional notes having identical terms to the notes being issued in this offering (the “additional notes”); provided, however, that unless such notes are issued under a separate CUSIP, either such additional notes are part of the same “issue” within the meaning of United States Treasury Regulation Section 1.1275-1(f) or neither the notes nor such additional notes are issued with original issue discount for U.S. federal income tax purposes.

The terms and conditions of each series of additional notes will be identical in all respects to the terms and conditions of the notes issued on the date of this offering memorandum, and the only difference will be their dates of original issue. The notes offered hereby and any additional notes will be treated as a single class for all purposes under the indenture and will vote together as one class on all matters with respect to the notes.

The Company will use its best efforts to obtain the same CUSIP and ISIN numbers for any additional notes as the notes outstanding at the time of the issuance of such series; provided, however, that if in the opinion of counsel, any such series of additional notes is a different class of security for U.S. federal income tax purposes than the notes already outstanding, the Company may obtain different CUSIP and ISIN numbers for the additional notes.

For purposes of this “Description of the Notes,” references to the notes include additional notes, if any.

Registration, Transfer and Exchange of Notes

The Trustee, as agent of the Company (in such capacity, the “Registrar”), shall maintain at its principal office in New York, a register of notes for the registration of notes and the transfers and exchanges thereof. The Company may also appoint additional agents (each such additional agent being herein called a “Co-Registrar”) for the purpose of maintaining, at one or more offices located elsewhere than the City of New York, a register or registers in which, subject to such reasonable regulations as it may prescribe, the Company may provide for the registration of, and the registration of transfers of, notes. The Company may vary or terminate the appointment of any Co-Registrar or approve any change in the location of any Co-Registrar, provided that there shall at all times be

135 a Co-Registrar in Western Europe and, provided, further, that at least one Co-Registrar located in Western Europe will, as long as the notes are listed on the Luxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange so require, be located in Luxembourg. The register maintained by the Registrar and the register or registers maintained by the Co-Registrar or Co-Registrars are herein called, collectively the “Note Register.” In the event that the Corporate Trust Office of the Registrar is not at any time in the City of New York, the Company shall appoint and maintain a Co-Registrar in the City of New York for the purpose of maintaining the Note Register in New York.

Upon registration of a note in the Note Register by the Registrar or any Co-Registrar, such note shall for all purposes of the indenture be deemed to be duly registered in the Note Register, provided, however, that in making any determination as to the identity of Persons who are registered Holders of notes, the Registrar and the Trustee shall be fully protected in relying (i) upon the Note Register and (ii) upon a certificate of any Co-Registrar as to the names and addresses of the registered Holders of the notes and the principal amounts and numbers of such notes. The Registrar and the Trustee shall be entitled to obtain a list of the names and addresses of the registered Holders of notes from any Co-Registrar not later than fifteen Business Days prior to the date of payment, and at such other times as the Registrar or the Trustee may reasonably request.

Every note presented or surrendered for registration of transfer or exchange shall (if so required by the Company or the Registrar) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Registrar duly executed by the Holder thereof or his attorney duly authorized in writing. In the case of a surrender by the Holder for transfer of part of a note only, a new note in the amount transferred will be issued to the transferee and a new note in the amount of any balance will be issued to the Holder or as the Holder shall direct. In the event of a partial transfer of notes, new notes may be obtained at the office of the Company or any Paying Agent.

Successive registrations and registrations of transfers and exchanges as aforesaid may be made from time to time as desired, and each such registration shall be noted on the Note Register. No service charge shall be made for any registration of transfer or exchange of the notes, but the Registrar may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith and any other amounts required to be paid by the provisions of the notes and the expenses of delivery other than by regular mail (if any).

Each note authenticated and delivered upon any registration of transfer of or in exchange for or in lieu of the whole or any part of any other note shall be the valid and binding obligation of the Company and shall evidence the same debt and shall carry all the rights to payments and other benefits which were carried by the whole or such part, as the case may be, of such other note.

For so long as the notes are listed on the Luxembourg Stock Exchange, presentment or surrender of a note for registration of transfer or exchange may be made by the Holder thereof to the Co-Registrar in Luxembourg with the same effect as if made to the Registrar in New York.

Prior to due presentment for registration of transfer, the Company, the Trustee, the Registrar, each Paying Agent and each Co-Registrar may treat the Person in whose name a note is registered in the Note Register as the owner thereof for all purposes, whether or not such note is overdue, and neither the Company, the Trustee, or any other Paying Agent, the Registrar, nor any Co-Registrar shall be affected by notice to the contrary.

Notwithstanding any other provision of the indenture or the notes, transfers of a Global Note, in whole or in part, and transfers of beneficial interests therein of the kind described in clauses (ii), (iii) or (iv) below, shall be made only in accordance with this paragraph, and all transfers of an interest in the Regulation S Global Note shall comply with clause (vi) below.

(i) General. A Global Note may not be transferred, in whole or in part, to any person other than the Depository Trust Company (“DTC”) or any successor to DTC or a nominee thereof, and no such transfer to any such other person may be registered; provided that this clause (i) shall not prohibit any transfer of a note that is issued in exchange for a Global Note but is not itself a Global Note. No transfer of a note to any person shall be effective under the indenture or the notes unless and until such note has been registered in the name of such person. Nothing in this clause (i) shall

136 prohibit or render ineffective any transfer of a beneficial interest in a Global Note effected in accordance with the other provisions of this paragraph.

(ii) Restricted Global Note to Regulation S Global Note. If the holder of a beneficial interest in the Restricted Global Note (as defined below), or the Holder of a Definitive Note which bears the Securities Act Legend (a “Restricted Definitive Note”) wishes at any time prior to expiration of the Restricted Period to transfer such interest or the whole or any part of the principal amount of such Restricted Definitive Note to a person who wishes to take delivery thereof in the form of a beneficial interest in the Regulation S Global Note, such transfer may be effected, subject to the rules and procedures of DTC, Euroclear and Clearstream, in each case to the extent applicable (the “Applicable Procedures”) only in accordance with the provisions of this clause (ii). Upon receipt by the Registrar or Co-Registrar at its office in New York of (1) written instructions given in accordance with the Applicable Procedures from an Agent Member directing the Registrar or Co- Registrar to credit or cause to be credited to a specified Agent Member’s account a beneficial interest in the Regulation S Global Note in a principal amount equal to that of the beneficial interest in the Restricted Global Note (or principal amount of the Restricted Definitive Note) to be so transferred and, in the case of a Restricted Definitive Note, the surrender thereof with the assignment of transfer on the reverse thereof duly completed, (2) a written order given in accordance with the Applicable Procedures containing information regarding the account of the Agent Member (and the Euroclear or Clearstream account, as the case may be) to be credited with, and the account of the Agent Member to be debited for, such beneficial interest or, in the case of a Restricted Definitive Note, written instructions regarding the account of the Agent Member (and the Euroclear or Clearstream account, as the case may be) to be credited with the principal amount of the Restricted Definitive Note to be transferred and (3) a certificate in substantially the form specified in an exhibit to the indenture given by the holder of such beneficial interest (or the Holder of such Restricted Definitive Note), the Registrar on Co-Registrar shall instruct DTC (A)(1) in the case of a transfer of a beneficial interest in the Restricted Global Note, to reduce the principal amount thereof and to increase the principal amount of the Regulation S Global Note, by the principal amount of the beneficial interest in the Restricted Global Note to be so transferred, or (2) in the case of a transfer of a Restricted Definitive Note, to increase the principal amount of the Regulation S Global Note by the principal amount of the Restricted Definitive Note to be so transferred, and (B) to credit or cause to be credited to the account of the person specified in such instructions (which shall be the Agent Member for Euroclear or Clearstream or both, as the case may be) a beneficial interest in the Regulation S Global Note having a principal amount equal to the amount by which the principal amount of the Restricted Global Note was reduced upon such transfer (or, in the case of a transfer of a Restricted Definitive Note, the principal amount thereof to be so transferred). In the case of a transfer of a Restricted Definitive Note, the Registrar or Co- Registrar shall cancel such Restricted Definitive Note and issue a new Restricted Definitive Note in the amount of any untransferred portion thereof.

(iii) Restricted Global Note to Unrestricted Global Note. If the holder of a beneficial interest in the Restricted Global Note (as defined below) wishes at any time to transfer such interest or the Holder of a Restricted Definitive Note wishes at any time to transfer the whole or any part of the principal amount of such Restricted Definitive Note to a person who wishes to take delivery thereof in the form of a beneficial interest in the Regulation S Global Note following the expiration of the Restricted Period (following the expiration of the Restricted Period the Regulation S Global Note is referred to as the “Unrestricted Global Note”) such transfer may be effected, subject to the Applicable Procedures only in accordance with this clause (iii). Upon receipt by the Registrar or Co-Registrar at its office in New York of (1) written instructions given in accordance with the Applicable Procedures from an Agent Member directing the Registrar or Co-Registrar to credit or cause to be credited to a specified Agent Member’s account a beneficial interest in the Unrestricted Global Note in a principal amount equal to that of the beneficial interest in the Restricted Global Note (or principal amount of the Restricted Definitive Note) to be so transferred, and, in the case of a Restricted Definitive Note, the surrender thereof with the assignment of transfer on the reverse thereof duly completed, (2) a written order given in accordance with the Applicable Procedures containing information regarding the account of the

137 Agent Member (and, in the case of any such transfer pursuant to Regulation S, the Euroclear or Clearstream account for which such Agent Member’s account is held) to be credited with, and the account of the Agent Member to be debited for, such beneficial interest or, in the case of a Restricted Definitive Note, written instructions regarding the account of the Agent Member (and, in the case of any such transfer pursuant to Regulation S, the Euroclear or Clearstream account for which such Agent Member’s account is held) to be credited with the principal amount of the Restricted Definitive Note to be transferred and (3) a certificate in substantially the form specified in an exhibit to the indenture given by the holder of such beneficial interest (or the Holder of such Restricted Definitive Note), the Registrar or Co-Registrar shall instruct DTC (A)(I) in the case of a transfer of a beneficial interest in the Restricted Global Note, to reduce the principal amount thereof, and to increase the principal amount of the Unrestricted Global Note, by the principal amount of the beneficial interest in the Restricted Global Note to be so transferred, or (2) in the case of a transfer of a Restricted Definitive Note, to increase the principal amount of the Unrestricted Global Note by the principal amount of the Restricted Definitive Note to be so transferred, and (B) to credit or cause to be credited to the account of the person specified in such instructions a beneficial interest in the Unrestricted Global Note having a principal amount transfer (or, in the case of a transfer of a Restricted Definitive Note, the principal amount thereof to be so transferred.) In the case of a transfer of a Restricted Definitive Note, the Registrar or Co- Registrar shall cancel such Restricted Definitive Note and issue a new Restricted Definitive Note in the amount of any untransferred portion thereof.

(iv) Regulation S Global Note or Unrestricted Global Note to Restricted Global Note. If the holder of a beneficial interest in the Regulation S Global Note or the Unrestricted Global Note or the Holder of a Restricted Definitive Note or a Definitive Note which does not bear the Securities Act Legend (an “Unrestricted Definitive Note”) wishes at any time to transfer such interest or the whole or any part of the principal amount of such Definitive Note to a person who wishes to take delivery thereof in the form of a beneficial interest in the Restricted Global Note, such transfer may be effected, subject to the Applicable Procedures only in accordance with this clause (iv). Upon receipt by the Registrar or Co-Registrar at its office in New York of (1) written instructions given in accordance with the Applicable Procedures from an Agent Member directing the Registrar or Co-Registrar to credit or cause to be credited to a specified Agent Member’s account a beneficial interest in the Restricted Global Note equal to that of the beneficial interest in the Regulation S Global Note or Unrestricted Global Note to be so transferred (or in the case of a Definitive Note, the principal amount thereof to be transferred), and, in the case of a Definitive Note, the surrender thereof with the assignment of transfer on the reverse thereof duly completed, (2) a written order given in accordance with the Applicable Procedures containing information regarding the account of the Agent Member to be credited with, and the account of the Agent Member (or, if such account is held for Euroclear or Clearstream, the Euroclear or Clearstream account, as the case may be) to be debited for, such beneficial interest, or, in the case of a Definitive Note, written instructions regarding the account of the Agent Member (and, in the case of any such transfer pursuant to Regulation S, the Euroclear or Clearstream account for which such Agent member’s account is held) to be credited with in respect of the principal amount of the Definitive Note to be transferred and (3) with respect to a transfer of a beneficial interest in the Regulation S Global Note (but not the Unrestricted Global Note) or a transfer of a Restricted Definitive Note, a certificate substantially in the form specified in an exhibit to the indenture given by the holder of such beneficial interest (or the Holder of such Restricted Definitive Note), the Registrar or Co- Registrar shall instruct DTC (A)(I) in the case of a transfer of a beneficial interest in the Regulation S Global Note or Unrestricted Global Note, to reduce the principal amount of the Regulation S Global Note or Unrestricted Global Note, as the case may be, and to increase the principal amount of the Restricted Global Note, by the principal amount of the beneficial interest in the Regulation S Global Note or Unrestricted Global Note to be so transferred, or (2) in the case of a Definitive Note, to increase the principal amount of the Restricted Global Note by the principal amount of the Definitive Note to be so transferred, and (B) to credit or cause to be credited to the account of the person specified in such instructions a beneficial interest in the Restricted Global Note having a principal amount equal to the amount by which the principal amount of the Regulation S Global Note or Unrestricted Global Note, as the case may be, was

138 reduced upon such transfer (or, in the case of a Definitive Note, the principal amount thereof to be so transferred.) In the case of a transfer of a Definitive Note the Registrar or Co-Registrar shall cancel such Definitive Note and issue a new Definitive Note in the amount of any untransferred portion thereof.

(v) Other Exchanges. In the event that a Global Note or any portion thereof is exchanged for notes other than Global Notes, such other notes and any Definitive Notes then outstanding may in turn be exchanged (on transfer or otherwise) for notes that are not Global Notes or Definitive Notes or for beneficial interests in a Global Note (if any is then outstanding) only in accordance with such procedures, which shall be substantially consistent with the provisions of clauses (i) and (iv) above (including the certification requirements intended to insure that transfers of beneficial interests in a Global Note comply with Rule 144A, Rule 144 or Regulation S under the Securities Act, as the case may be) and any Applicable Procedures, as may be from time to time adopted by the Company and the Trustee.

(vi) Interests in Regulation S Global Note to be Held Through Euroclear or Clearstream. Until the termination of the Restricted Period, interests in the Regulation S Global Note may be held only through Agent Members acting for and on behalf of Euroclear and Clearstream, provided that this clause (vi) shall not prohibit any transfer in accordance with clause (iv) hereof.

If interests in any Global Note are transferred to the beneficial owners thereof in the form of Definitive Notes, such Global Note shall be surrendered by the DTC to the Registrar or the Co-Registrar located in the City of New York, without charge, and the Trustee shall authenticate and deliver, upon such transfer of interests in such Global Note, an equal amount of definitive notes of authorized denominations, and cause the reduction of the Global Note by such principal amount. Any Definitive Note delivered in exchange for an interest in the Restricted Global Note shall bear a legend regarding transfer restrictions applicable to the Restricted Global Note.

Payments of Principal and Interest

Payment of the principal of the notes (together with accrued interest) or payment upon redemption will only be made following surrender thereof at the office of the Trustee or any other Paying Agent, subject to applicable laws, to the person in whose name such note is registered at 5:00 p.m., New York time, on the due date for such payment. Payments of interest on a note (other than the last payment of principal and interest, which is payable on surrender of the note as aforesaid) will be made to the person in whose name such note is registered at 5:00 p.m., New York time, on the Regular Record Date (whether or not a business day) immediately preceding the Interest Payment Date. Payments of principal and interest will be made on the notes upon receipt by the relevant Paying Agent of appropriate wiring instructions no later than the Regular Record Date (or, with respect to payments at maturity, 15 days prior to maturity) for such payment, by wire transfer to a U.S. dollar account maintained by the Holder with a bank located in the City of New York. If any day for payment of principal or interest or redemption in respect of any note is not a business day in the city in which the relevant Paying Agent is located, the Holder shall not be entitled to payment until the next business day following such day in such place and shall not be entitled to any interest or other payment as a result of such delay. Upon surrender of notes (duly endorsed in blank) for payment prior to the Stated Maturity as a result of acceleration by the Holders as described under “Events of Default,” the Trustee shall, at the direction of the Company, cause such notes to be transferred to a third party upon payment in full as and when due, to the Holder surrendering such notes, of the principal of the note together with accrued interest due.

The Company agrees that so long as any of the notes are outstanding, it will maintain a Paying Agent in a Western European city (which will be Luxembourg so long as the notes are listed on the Luxembourg Stock Exchange and the rules of such Exchange so require) for payments on the notes. The Company has initially appointed Deutsche Bank Luxembourg, S.A. as the Luxembourg Paying Agent in Luxembourg and Deutsche Bank Trust Company Americas as the Principal Paying Agent. Subject to the foregoing, the Company shall have the right at any time to terminate any such appointments and to appoint any other Paying Agents in such other places as the Company may deem appropriate upon receipt of notice.

139 The Company has appointed the Principal Paying Agent to receive payment of the principal amount of, and interest on, the notes. Payment of such sums to the Principal Paying Agent in accordance with the indenture will satisfy the obligation of the Company to make such payments. The Company has agreed to indemnify the Holders against any failure on the part of the Principal Paying Agent or any Paying Agent to pay any sum due in respect of the notes.

Payments in respect of the notes shall be made in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts.

Subject to applicable law, the Trustee and the Paying Agents shall pay to the Company upon request any monies held by them for the payment of principal or interest that remains unclaimed for two years, and, thereafter, Holders entitled to such monies must look to the Company for payment as general creditors.

Additional Amounts

All payments by the Company in respect of the notes shall be made free and clear of, and without withholding or deduction for or on account of any present or future taxes, duties, assessments, or other governmental charges of whatsoever nature imposed or levied by or on behalf of Brazil or by or on behalf of the jurisdiction of the Paying Agent, or, in each case, any political subdivision or authority thereof or therein having power to tax (each a “Taxing Jurisdiction”) unless the Company is required by law to withhold or deduct such taxes, duties, assessments, or other governmental charges. In such event, the Company shall make the required withholding or deduction, make payment of the amount so withheld or deducted to the appropriate government authority and pay such additional amounts (“Additional Amounts”) as may be necessary to ensure that the net amounts received by the Holders after such withholding or deduction shall equal the respective amounts of principal and interest which would have been receivable in respect of the notes in the absence of such withholding or deduction; provided, however, that no such Additional Amounts shall be payable:

(i) with respect to any tax which would not have been imposed but for the existence of any present or former connection between such Holder, on the one hand, and the Taxing Jurisdiction, on the other hand, other than the mere receipt of such payment or the ownership or holding of such notes;

(ii) if such payment would not have been subject to such taxes, duties, assessments or other governmental charges had the request for payment been made within 30 days of the related due date or, in case the full amount of funds payable had not been provided to the Principal Paying Agent when due, within 30 days of the date on which such funds have been received by the Principal Paying Agent and notice thereof has been given;

(iii) to the extent that the taxes, duties, assessments or other governmental charges would not have been imposed but for the failure of such Holder to comply with any certification, identification or other reporting requirements concerning the nationality, residence or identity or connection to Brazil of the Holder (A) if such compliance is required or imposed by law as a precondition to exemption from all or a part of such tax, duty assessment or other governmental charge and (B) at least 30 days prior to the first Interest Payment Date with respect to which the Company will apply this clause (iii), the Company shall have notified the Holders that such Holders will be required to comply with such requirement;

(iv) in respect of any estate, inheritance, gift, sales, transfer, capital gains, excise or personal property or similar tax, assessment or governmental charge; or

(v) in respect of any combination of the above.

No Additional Amounts will be paid to a Holder that is a depository or its nominee, a fiduciary or a partnership or other than the sole beneficial owner of such payment to the extent a beneficiary or settlor with respect to such fiduciary or a member of such partnership or beneficial owner would not have been entitled to receive

140 payment of the Additional Amounts had the beneficiary, settlor, member or beneficial owner been the Holder of the note.

The Company will make any required withholding or deduction and remit the full amount withheld or deducted to the relevant taxing authority in accordance with applicable law. The Company will furnish to the Trustee, within 30 days after the date of payment of any such taxes, certified copies of tax receipts or other documentation reasonably satisfactory to the Trustee evidencing that payment. Upon request, copies of those receipts or other documentation, as the case may be, will be made available to the Holders.

At least 30 days prior to each date on which any payment under or with respect to the notes is due and payable, if the Company will be obligated to pay Additional Amounts with respect to such payment, we will deliver to the Trustee an Officers’ Certificate stating the fact that such Additional Amounts will be payable and the amounts so payable and will set forth such other information necessary to enable the Trustee to pay such Additional Amounts to the Holders of notes on the payment date.

The Company will pay any stamp, administrative, court, documentary, excise or property taxes arising in a Taxing Jurisdiction from the initial execution, delivery or registration of the notes and will indemnify the Holders for any such taxes paid by Holders, excluding any such taxes imposed by any jurisdiction outside of Brazil unless resulting from, or required to be paid in connection with, the enforcement of the notes following the occurrence of any Default or Event of Default.

These obligations will survive any termination or discharge of the notes and the indenture.

All references to principal of and interest on the notes shall include any Additional Amounts payable by the Company in respect of such principal and such interest.

Redemption

Unless previously redeemed or purchased and cancelled, the notes will mature on December 16, 2020.

Redemption at the Option of the Company Beginning in 2015

On and after December 16, 2015, the Company may on any one or more occasions redeem the notes, at its option, in whole or in part, at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest and Additional Amounts, if any, to, but excluding, the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on December 16 of the years set forth below:

Period Redemption Price 2015...... 103.125% 2016...... 102.083% 2017...... 101.042% 2018 and thereafter ...... 100.000%

Any redemption of notes by the Company pursuant to this paragraph will be subject to either (i) there being at least U.S.$150.0 million in aggregate principal amount of notes (including any additional notes) outstanding after such redemption or (ii) the Company redeeming all the then outstanding principal amount of the notes.

Redemption at the Option of the Company for Changes in Brazilian Withholding Tax

If (i) as a result of any change in or amendment to the laws (or any regulations or rulings promulgated thereunder) of a Taxing Jurisdiction or any change in official position regarding application or interpretation of such laws, regulations or rulings (including a holding by a court of competent jurisdiction), which change or amendment becomes effective on or after the original issue date of the notes, the Company shall become obligated to pay

141 Additional Amounts on the notes in excess of the Additional Amounts that the Company would pay if payments in respect of the notes were subject to deduction or withholding at a rate of 15%, or at a rate of 25% in case the Holder is resident in a tax haven jurisdiction for Brazilian tax purposes (i.e., countries which do not impose any income tax or which impose it at a maximum rate lower than 20% or where the laws impose restrictions on the disclosure of ownership composition or securities ownership), and (ii) such obligation cannot be avoided by the Company taking reasonable measures available to it, the notes will be subject to redemption at the option of the Company, at any time in whole but not in part, at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the date fixed for redemption, upon the giving of notice as described below. In the event that the Company elects to redeem the notes as described in this section, the Company will deliver to the Trustee an Officers’ Certificate stating that (i) the obligation to pay such Additional Amounts cannot be avoided by the Company taking reasonable measures available to it and (ii) the Company is entitled to redeem the notes pursuant to their terms. The Company will also deliver to the Trustee a written opinion of an independent Brazilian counsel of recognized standing, such opinion to be reasonably satisfactory to the Trustee, to the effect that the Company has become obligated to pay such Additional Amounts as a result of a change or amendment described above. The Company shall give notice to the Holders not less than 30 and not more than 60 days prior to the date scheduled for such redemption, provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Company would incur an obligation to pay such Additional Amounts if a payment in respect of the notes were then due. Such notice shall be signed by two executive officers of the Company and shall specify the date the notes are to be redeemed and the circumstances giving rise to the Company’s entitlement to effect such redemption. Any such notice shall be irrevocable, and the delivery thereof shall oblige the Company to make the redemption therein specified.

Optional Redemption Procedures

In the event that less than all of the notes are to be redeemed at any time, selection of notes for redemption will be made by the Trustee in compliance with the requirements governing redemptions of the principal securities exchange, if any, on which notes are listed or if such securities exchange has no requirement governing redemption or the notes are not then listed on a securities exchange, on a pro rata basis or by lot (or, in the case of notes issued in global form, based on a method that most nearly approximates a pro rata selection in accordance with the procedures of DTC). If notes are redeemed in part, the remaining outstanding amount must be at least equal to U.S.$200,000 and be an integral multiple of U.S.$1,000.

Notice of any redemption will be mailed by first-class mail, postage prepaid, at least 30 but not more than 60 days before the redemption date to holders of notes to be redeemed at their respective registered addresses or otherwise in accordance with the procedures of DTC. If notes are to be redeemed in part only, the notice of redemption will state the portion of the principal amount thereof to be redeemed. For so long as the notes are listed on the Luxembourg Stock Exchange (EuroMTF Market) and the rules of the exchange require, the Company will cause notices of redemption to also be published as described in “—Notices” below. A new note in a principal amount equal to the unredeemed portion thereof, if any, will be issued in the name of the holder thereof upon cancellation of the original note (or appropriate adjustments to the amount and beneficial interests in a global note will be made, as appropriate).

Notes called for redemption will become due on the date fixed for redemption. The Company will pay the redemption price for any note together with accrued and unpaid interest thereon through, but excluding, the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). On and after the redemption date, interest will cease to accrue on notes or portions thereof called for redemption as long as the Company has deposited with the paying agent funds in satisfaction of the applicable redemption price pursuant to the indenture. Upon redemption of any notes by the Company, such redeemed notes will be cancelled.

Purchase of Notes Upon Change of Control Event

Not later than 30 days following a Change of Control that results in a Ratings Decline, the Company will make an Offer to Purchase all outstanding notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest thereon and any Additional Amounts payable with respect thereto.

142 An “Offer to Purchase” must be made by written offer, which will specify the principal amount of notes subject to the offer and the purchase price. The offer must specify an expiration date (the “Expiration Date”) not less than 30 days or more than 60 days after the date of the offer and a settlement date for purchase (the “Purchase Date”) not more than five business days after the Expiration Date. The offer must include information concerning the business of the Company that it believes will enable the holders to make an informed decision with respect to the Offer to Purchase. The offer will also contain instructions and materials necessary to enable holders to tender notes pursuant to the offer. The Company will comply with Rule 14e-1 under the Exchange Act (to the extent applicable) and all other applicable laws in making any Offer to Purchase, and the above procedures will be deemed modified as necessary to permit such compliance.

A holder may tender all or any portion of its notes pursuant to an Offer to Purchase, subject to the requirement that if a holder tenders only a portion of its notes, the remaining notes must be no less than U.S.$200,000 in principal amount and in multiples of U.S.$1,000 in excess thereof. Holders shall be entitled to withdraw notes tendered up to the close of business on the Expiration Date. On the Purchase Date, the purchase price will become due and payable on each note accepted for purchase pursuant to the Offer to Purchase, and interest on notes purchased will cease to accrue on and after the Purchase Date.

The Company will not be required to make an Offer to Purchase upon a Change of Control that results in a Ratings Decline if (1) a third party makes the Offer to Purchase in the manner, at the times and otherwise in compliance with the requirements set forth in the indenture applicable to an Offer to Purchase made by the Company and purchases all notes properly tendered and not withdrawn under the Offer to Purchase, or (2) a notice of redemption for all outstanding notes has been given pursuant to the indenture unless and until there is a default in payment of the applicable redemption price.

“Change of Control” means:

(1) the merger or consolidation of the Company with or into another Person or the merger of another Person with or into the Company or the merger of any Person with or into a Subsidiary of the Company, if Capital Stock of the Company is issued in connection therewith, or the sale of all or substantially all the assets of the Company to another Person (in each case, unless such other Person is a Permitted Holder) unless holders of a majority of the aggregate voting power of the Voting Stock of the Company, immediately prior to such transaction, hold securities of the surviving or transferee Person that represent, immediately after such transaction, at least a majority of the aggregate voting power of the Voting Stock of the surviving Person; or

(2) any “person” or “group” (as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, other than a Permitted Holder) is or becomes the “beneficial owner” (as such term is used in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total voting power of the Voting Stock of the Company.

“Permitted Holder” means the State of São Paulo.

“Rating Decline” means that at any time within 90 days (which period shall be extended so long as the rating of the notes is under publicly announced consideration for possible downgrade by either Rating Agency) after the date of public notice of a Change of Control, or of our intention or that of any Person to effect a Change of Control, the then-applicable rating of the notes is decreased by either Rating Agency by one or more categories (i.e., notches); provided that any such Rating Decline is in whole or in part in connection with a Change in Control.

Open Market Purchases

The Company may at any time purchase notes in the open market or otherwise at any price.

143 Cancellation of Redeemed and Purchased Notes

All unmatured notes redeemed by the Company will be cancelled and may not be reissued or resold. Notes purchased by the Company and not surrendered to the Trustee for cancellation may be reissued and resold by the Company in compliance with applicable law (including the U.S. securities laws).

Ranking

The notes will constitute existing senior unsecured obligations of the Company, and will rank pari passu with each other and rank at least pari passu with all other existing and future senior unsecured indebtedness of the Company, subject to certain statutory preferences (including tax and labor claims).

The notes are not guaranteed by Brazil or the State of São Paulo, and holders of notes will not be able to rely on the resources of Brazil or the State of São Paulo for repayment of the notes.

The notes may be structurally subordinated to any Indebtedness of the Company’s current and future subsidiaries.

Certain Covenants

The indenture will contain, among others, the following covenants:

Statement as to Compliance

The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year, a written statement signed by any of its Chief Executive Officer, its Chief Financial Officer, its Treasurer or its Superintendente de Captação de Recursos, stating, as to the signatory thereto that:

(a) a review of the activities of the Company during such year and of performance under the indenture has been made under his or her supervision, and

(b) to the best of his or her knowledge, based on the review the Company has fulfilled all of its obligations under the indenture throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to him and the nature and status thereof.

Certain Reporting Requirements

The Company at all times shall keep, and, shall cause each Subsidiary to keep, true and complete books of record and account, in accordance with Brazilian GAAP, and shall furnish to the Trustee for distribution to a Holder, upon any such Holder’s written request:

(a) an English language version of its annual audited consolidated financial statements prepared in accordance with Brazilian GAAP, together with (i) a supplemental consolidated balance sheet and statement of income prepared on the basis of Brazilian GAAP, promptly upon such statements becoming available but not later than 120 days after the close of its fiscal year and (ii) a report and opinion of independent accountants of recognized standing selected by the Company, which report and opinion shall be based upon an examination made in accordance with Brazilian GAAP;

(b) an English language version of its unaudited quarterly consolidated financial statements all in reasonable detail and in accordance with Brazilian GAAP on a basis consistent with the audited annual financial statements of the Company, together with a supplemental consolidated balance sheet and statement of income prepared on the basis of Brazilian GAAP, promptly upon such statements becoming available but not later than 60 days after the close of the relevant quarterly

144 fiscal period (it being recognized that no quarterly financial statements need be prepared for the fourth quarter of the fiscal year); and

(c) simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement in English by the independent public accountants whose report and opinion accompanied such financial statements that, in making the examination necessary for such report and opinion, such accountants have obtained no knowledge of any default of the Company on the notes or in the fulfillment of any of the terms, covenants or provisions of the indenture, or under any other evidence of Indebtedness, of any event which, with notice or lapse of time, or both, would constitute an event of default on the notes or under the indenture or under any other evidence of Indebtedness or if, in the opinion of such accountants, any such event of default or other default shall exist, a statement as to the nature and status thereof shall be included; such report shall also include or be accompanied by such other reports, schedules or information as may have been delivered to the Company in connection with such examination.

The Company will furnish the Trustee such other information as the Trustee may reasonably from time to time request with respect to the Company and its Subsidiaries and will permit the Trustee and its officers, employees and agents from time to time to visit any of the properties of the Company and its Subsidiaries and inspect their records at such reasonable times as the Trustee may desire.

Negative Pledge

So long as any notes remain outstanding, the Company shall not, and shall not permit any of its Subsidiaries to, at any time create, Incur or suffer to exist any Lien other than Permitted Liens with respect to any properties or assets of the Company or any such Subsidiary (as the case may be) now owned or hereafter acquired to secure any Indebtedness, unless the Company or such Subsidiary causes such Lien to secure equally and ratably the obligations of the Company under the notes.

Limitation on Indebtedness

(a) The Company shall not, and shall not permit any Subsidiary to, Incur (or agree to Incur) any Indebtedness unless (i) no Event of Default shall have occurred and be continuing and (ii) after giving pro forma effect to the Incurrence of such Indebtedness and any other Indebtedness Incurred since the end of the most recent fiscal quarter of the Company and the receipt and application of the proceeds thereof:

(A) the ratio of Adjusted Total Debt to Adjusted EBITDA of the Company for the four most recently completed fiscal quarters of the Company, determined as of the date of Incurrence of such Indebtedness, shall not be greater than 3.65; and

(B) the Debt Service Coverage Ratio of the Company, determined as of the date of Incurrence of such Indebtedness, shall not be less than 2.35.

(b) Notwithstanding paragraph (a) above, the Company and its Subsidiaries may Incur the following Indebtedness:

(i) Indebtedness the proceeds of which are used to refinance any Indebtedness permitted by paragraph (a) above, the notes, and Indebtedness of the Company or its Subsidiaries outstanding on the date of the indenture or any Indebtedness permitted by this paragraph (b); provided, however, that (1) the principal amount of the Indebtedness so issued shall not exceed the principal amount of the Indebtedness so refinanced plus reasonable premium, fees and expenses and (2) the Indebtedness so issued (A) shall not mature prior to the final Stated Maturity of the Indebtedness so refinanced, (B) shall have a ranking no greater than the Indebtedness so refinanced, and (C) shall not be secured to any greater

145 extent than, or by any assets or revenues other than those securing, the Indebtedness so refinanced;

(ii) Indebtedness of the Company owed to and held by a Subsidiary of the Company;

(iii) Indebtedness of a Subsidiary of the Company owed to and held by the Company or any other Subsidiary of the Company;

(iv) Indebtedness owed to, directly or indirectly, any Brazilian federal governmental lender, including, without limitation, the Caixa Econômica Federal and Banco Nacional de Desenvolvimento (“BNDES”) and Indebtedness Incurred to any other lender which lender has been funded by any such Brazilian Federal Government lender pursuant to customary Brazilian “repassing” arrangements;

(v) Indebtedness Incurred by the Company or any Subsidiary in connection with PPP Projects;

(vi) Indebtedness Incurred by a Subsidiary of the Company pursuant to a Project Financing and which Indebtedness is not guaranteed by the Company; and

(vii) Indebtedness which the Company would not otherwise except for this clause (vii) be permitted to Incur provided that after the Incurrence of such Indebtedness the aggregate principal amount of all Indebtedness Incurred in reliance on this clause (vii) shall not exceed the greater of (A) U.S.$200,000,000 (or its equivalent in other currencies) and (B) 1.00% of Adjusted Shareholders’ Equity.

Notwithstanding any other provision of this covenant, a guarantee of Indebtedness permitted by the terms of the indenture at the time such Indebtedness was Incurred shall not constitute a separate Incurrence of Indebtedness.

In the event that Indebtedness falls within more than one category of permitted Indebtedness as set out above, the Company shall determine the applicable category and such Indebtedness shall only be counted once. If Indebtedness is issued at less than the principal amount thereof, the amount of such Indebtedness for purposes of the above limitations shall equal the amount of the liability as determined in accordance with Brazilian GAAP.

Compliance with Laws, Rules and Regulations

The Company will, and will cause its Subsidiaries to, comply with all applicable laws, rules, regulations, orders and directions of any governmental agency having jurisdiction over its business and all covenants and other obligations contained in any agreements to which it is a party; provided, however, that such compliance will not be required unless the failure so to comply would have a material adverse effect upon the condition (financial or other), business prospects or results of the Company’s operations and of its Subsidiaries considered as one enterprise or a material adverse effect on the performance of the Company’s obligations hereunder or under the notes.

Notification of Default

The Company agrees as soon as reasonably practicable and in any event no later than five Business Days following its becoming aware of the occurrence of any such event to inform the Trustee of the occurrence of (i) any Event of Default, or (ii) any event that, with the passing of time or the giving of notice, will become or result in an Event of Default.

Limitation on Sale-Leaseback

The Company shall not, and shall not permit any Subsidiary to, enter into, renew or extend any Sale and Leaseback Transaction, except a Sale and Leaseback Transaction that, had such Sale and Leaseback Transaction

146 been structured as a mortgage loan rather than as a Sale and Leaseback Transaction, the Company would not have been prohibited from entering, or permitting its Subsidiary to enter, into such transaction pursuant to “—Negative Pledge.”

Limitations on Certain Transactions with Affiliates

The Company will not, nor will it permit any Subsidiary to, enter into or permit to exist any transaction (including the purchase, sale, lease or exchange of any property, employee compensation arrangements or the rendering of any service) with, or for the benefit of, any Affiliate, other than a wholly-owned Subsidiary (an “Affiliate Transaction”) unless the terms of the Affiliate Transaction are no less favorable to the Company or such Subsidiary than those that could be obtained at the time of the Affiliate Transaction in arm’s length dealings with a person who is not an Affiliate.

Limitations on Business Activities

The Company will only engage in the business of basic sanitation (saneamento básico), including water and sewage services, urban rainwater management and drainage services, urban cleaning services and solid waste management services, and any businesses that are reasonably related, ancillary or complementary thereto.

Additional Covenants

The indenture will also contain covenants with respect to, among other things, the following matters: (i) payment of principal and interest; (ii) payment of taxes and other claims; (iii) maintenance of properties; (iv) maintenance of corporate existence; (v) maintenance of insurance; and (vi) listing on the Luxembourg Stock Exchange (“EuroMTF Market”).

Merger and Consolidation

The Company shall not consolidate with or merge with or into, or sell, assign, convey, transfer, lease or otherwise dispose of, in a single transaction or a series of transactions, all or substantially all its assets to, any Person or group of affiliated Persons, unless: (i) either the Company shall be the continuing entity, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person that acquires by sale, assignment, conveyance, transfer, lease or other disposition of all or substantially all of the assets of the Company (the “surviving entity”) is organized under the laws of Brazil and such surviving entity assumes by supplemental indenture, executed and delivered to the Trustee in form and substance reasonably satisfactory to the Trustee, all obligations of the Company on the notes and under the indenture; (ii) immediately after giving effect to such transaction or series of transactions (and treating any Indebtedness that becomes an obligation of the surviving entity as a result of such transaction, as having been Incurred by such surviving entity at the time of such transaction), no Default or Event of Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction or series of transactions, the net worth of the Company or the surviving entity, as the case may be, is equal to or greater than the net worth of the Company prior to such transaction or series of transactions; (iv) immediately after giving effect to such transaction or series of transactions, the Company or the surviving entity as the case may be, could Incur at least U.S.$1.00 of additional Indebtedness without violating “—Limitation on Indebtedness”; and (v) the Company or the surviving entity, as the case may be, shall have delivered, or caused to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers’ Certificate and an Opinion of Counsel, each to the effect that such transaction and the supplemental indenture in respect thereto comply with the indenture and that all conditions precedent provided for relating to such transaction have been complied with and that such supplemental indenture is valid, binding and enforceable against the Company, in accordance with its terms.

Covenant Suspension

If on any date following the Closing Date:

(a) the notes have been assigned an Investment Grade rating by any two Rating Agencies; and

147 (b) no Default shall have occurred and be continuing, then, beginning on that day and subject to the provisions of the following two paragraphs, the covenants specifically listed under the following captions will automatically, without any notice of any kind, be suspended (and the Company and its Subsidiaries will have no obligation or liability whatsoever with respect to such covenants):

(i) “—Limitation on Indebtedness”;

(ii) “—Limitation on Sale-Leaseback”; and

(iii) “—Negative Pledge”.

Clauses (i) through (iii) above are collectively referred to as the “Suspended Covenants”.

If, during any period in which the Suspended Covenants are suspended, the notes cease to have an Investment Grade rating by two Rating Agencies, the Suspended Covenants will thereafter be reinstated and be applicable pursuant to the terms of the indenture (including in connection with performing any calculation or assessment to determine compliance with the terms of the indenture), unless and until the notes subsequently attain an Investment Grade rating by any two Rating Agencies (in which event the Suspended Covenant will again be suspended for such time that the notes maintain an Investment Grade rating by any two Rating Agencies).

No Default or breach or violation of any kind will be deemed to exist under the indenture and the notes with respect to the Suspended Covenants (whether during the period when the Suspended Covenants were suspended or thereafter) based on, and none of the Company or any of its Subsidiaries will bear any liability (whether during the period when the Suspended Covenants were suspended or thereafter) for, any actions taken or events occurring after the notes attain an Investment Grade Rating by any two Rating Agencies and before any reinstatement of the Suspended Covenants as provided above, or any actions taken at any time (whether during the period when the Suspended Covenants were suspended or thereafter) pursuant to any contractual obligation arising prior to the reinstatement of the Suspended Covenants, regardless of whether those actions or events would have been permitted if the applicable Suspended Covenants had remained in effect during such period.

Modification of the Indenture; Waiver of Covenants

Modifications and amendments of the indenture may be made by the Company and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the notes then outstanding; provided, however, that no such modification or amendment may, without the consent of the Holder of each outstanding note affected thereby: (i) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any note or reduce the principal amount thereof or the rate of interest thereon, or change the coin or currency in which any note or any interest thereon is payable or impair the right to institute suit for the enforcement of any such payment after the Stated Maturity thereof; (ii) reduce the requirements for quorum and voting under the indenture or reduce the percentage in principal amount of the outstanding notes, the consent of whose Holders is required for any such amendment or modification, or the consent of whose Holders is required for any waiver; (iii) modify any of the provisions relating to supplemental indentures requiring the consent of Holders or relating to the waiver of past defaults or relating to the waiver of certain covenants, except to increase the percentage in principal amount of outstanding notes required for such action or to provide that certain other provisions of the indenture may not be modified or waived without the consent of the Holder of each note affected thereby; (iv) waive a default in payment with respect to any note (other than a default in payment that is due solely because of acceleration of the maturity of the notes); (v) alter the provisions in any manner adverse to the Holders relating to the payment of Additional Amounts; or (vi) change the obligations of the Company to maintain a Paying Agent in a Western European city.

Notwithstanding the foregoing, without the consent of the holders of the notes, the Company and the Trustee may modify or amend the indenture (i) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company in the indenture and in the notes in accordance with “—Merger and Consolidation”; (ii) to provide for uncertificated notes, in addition to or in place of, certificated notes; (iii) to add to the covenants of the Company for the benefit of the Holders of the notes, or to surrender any

148 right or power herein conferred upon the Company in the indenture or in the notes; (iv) to cure any ambiguity, to correct or supplement any provision in the indenture which may be defective or inconsistent with any other provision in the indenture or in the notes, or to make any other provisions with respect to matters or questions arising under the indenture or the notes provided that such provisions shall not adversely affect in any material respect the interests of any Holder of any note; (v) to secure the notes pursuant to the “—Negative Pledge” covenant; (vi) to add a guarantor under the indenture; (vii) to evidence and provide the acceptance or the appointment of a successor Trustee under the indenture; or (viii) to evidence and provide for the issuance of additional notes under the indenture.

The Holders of a majority in aggregate principal amount of the notes outstanding may waive compliance with certain restrictive covenants and provisions of the indenture.

For so long as the notes are listed on the Luxembourg Stock Exchange and the rules of that exchange so require, if the indenture is modified or amended, the Company will promptly publish a notice in Luxembourg to that effect in accordance with the provisions described under “Notices”.

Events of Default

The indenture will set forth the following Events of Default:

(i) failure by the Company to pay interest (including, without limitation, Additional Amounts, if any) on any note when due and payable, if such failure continues for a period of 30 days;

(ii) failure by the Company to pay the principal (including, without limitation, Additional Amounts, if any) on any note when due and payable (whether at maturity or upon redemption, acceleration or otherwise), if such failure continues for a period of 5 days;

(iii) failure by the Company to comply with any other agreement or covenant contained in the indenture if such failure continues for a period of 30 days after (x) the Company becomes aware of such failure or (y) notice to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the notes then outstanding;

(iv) the Company or any of its Subsidiaries shall default in a payment of an aggregate amount of U.S.$50,000,000 or more (or its equivalent in other currencies) beyond any grace period provided with respect thereto in respect of Indebtedness for money borrowed of the Company or any of its Subsidiaries (other than the notes), or the maturity of any Indebtedness for money borrowed of the Company or any of its Subsidiaries having an aggregate principal amount of U.S.$50,000,000 or more (or its equivalent in other currencies) shall be accelerated;

(v) it becomes unlawful for the Company to perform its payment obligations under the indenture or the notes, or such obligations thereunder cease to be valid, binding or enforceable;

(vi) the occurrence of certain events of bankruptcy or insolvency of the Company or a Significant Subsidiary; or

(vii) existence of one or more final judgments against the Company or any of its Subsidiaries in excess of U.S.$50,000,000, either individually or in the aggregate, which remain undischarged 60 days after all rights to directly review such judgment, whether by appeal or writ, have been exhausted or have expired.

If an Event of Default occurs and is continuing, the Trustee or the Holders of not less than 25% in principal amount of the notes then outstanding may declare all the notes to be immediately due and payable by notice to the Company (and to the Trustee if given by the Holders). Under certain circumstances, the Holders of a majority in principal amount of the notes then outstanding may rescind such a declaration.

149 Defeasance or Covenant Defeasance of the Indenture

The Company may, at its option and at any time, elect to have its obligations with respect to the outstanding notes discharged (“defeasance”). Such defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding notes, except for the rights of Holders of outstanding notes to receive payments in respect of the principal of and interest on such notes when such payments are due and certain provisions of the indenture with respect to the registration and transfer of the notes. In addition, the Company may, at its option and at any time, elect to have its obligations and the obligations of its subsidiaries with respect to certain covenants described in the indenture released (“covenant defeasance”) and thereafter any failure to comply with such covenants shall not constitute a Default or an Event of Default. In the event of a covenant defeasance, certain other events (not including payment, bankruptcy or insolvency events) described under “Events of Default” will no longer constitute a Default or an Event of Default with respect to the notes.

In order to exercise either defeasance or covenant defeasance, (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of notes, cash in U.S. dollars, U.S. Government Obligations (as defined in the indenture), or a combination thereof (collectively, the “trust fund”) in such amounts as will be sufficient, in the opinion of an internationally recognized firm of independent accountants, to pay and discharge interest on the outstanding notes as it becomes due and to pay and discharge the principal of the outstanding notes at redemption or maturity; (ii) in the case of defeasance, the Company must deliver to the Trustee an Opinion of Counsel in the United States stating that (1) the Company has received from, or there has been published by, the U.S. Internal Revenue Service a ruling or (2) since the date of the indenture, there has been a change in the applicable U.S. federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel in the United States shall confirm that, the Holders of the outstanding notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (iii) in the case of covenant defeasance, the Company must deliver to the Trustee an Opinion of Counsel in the United States to the effect that the Holders of the outstanding notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such covenant defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; (iv) no Default or Event of Default may have occurred and be continuing on the date of such deposit and after giving effect thereto; (v) such defeasance or covenant defeasance may not cause the Trustee for the notes to have a conflicting interest with respect to any securities of the Company; (vi) such defeasance or covenant defeasance may not result in a breach or violation of, or constitute a Default under, the indenture or any material agreement or instrument to which the Company is a party by which it is bound; (vii) the Company must deliver to the Trustee an Officers’ Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of the notes over the other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company; (viii) no event or condition may exist that would prevent the Company from making payments of the principal of, premium, if any, and interest on the notes, on the date of such deposit; (ix) the Company must deliver to the Trustee an Officers’ Certificate and an Opinion of Counsel in the United States each stating that all conditions precedent under the indenture relating to either the defeasance or the covenant defeasance, as the case may be, have been complied with and (x) the Company must pay, including to the Trustee and Paying Agent, all other amounts due under the indenture.

Satisfaction and Discharge

The indenture will cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the notes, as expressly provided for in the indenture) as to all outstanding notes when (i) either (1) all the notes theretofore authenticated and delivered (except lost, stolen or destroyed notes which have been replaced or paid) have been delivered to the Trustee for cancellation or (2) all notes not theretofore delivered to the Trustee for cancellation have become due and payable, or will become due and payable or are to be called for redemption within one year, and the Company has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire Indebtedness on the notes not theretofore delivered to the Trustee for cancellation, for principal of, and premium, if any, and interest on the notes to the date of deposit together with irrevocable instructions to the Trustee from the Company directing the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be; (ii) the Company has paid all other sums payable under the indenture by the Company; and (iii) the Company has delivered to the Trustee an Officers’ Certificate and an

150 Opinion of Counsel each stating that all conditions precedent under the indenture relating to the satisfaction and discharge of the indenture have been complied with.

Trustee and Registrar

Deutsche Bank Trust Company Americas, the Trustee under the indenture, may from time to time enter into ordinary correspondent and other banking relationships with the Company. Deutsche Bank Trust Company Americas is also the Registrar for purposes of the indenture. The address of the principal corporate trust office of the Trustee and Registrar is set forth on the inside back cover page hereof.

Meetings of Holders

The Company or the Trustee, upon the request of the Holders owning at least 10% in aggregate principal amount of the outstanding notes, or the Company, at its discretion, may call a meeting of Holders at any time and from time to time, to make, give, or take any request, demand, authorization, notice, consent, election, waiver or other action permitted by the indenture. Any such meeting will be held in City of New York. Notice of every meeting of Holders, setting forth, in general, the time and the place of, and the agenda for, such meeting, shall be given not less than 10 days nor more than 30 days prior to the date fixed for the meeting, in the manner provided under “Notices” and publication thereof shall be at least once in each place of publication. In the absence of quorum within 45 minutes of the time appointed for any such meeting, a second call meeting (the “second call meeting”) may be called to take place. Persons holding or representing a majority of the aggregate principal amount of the notes at the time outstanding, or in the case of any second call meeting, the Holders present or represented at such meeting, shall constitute a quorum for any meeting of Holders. The unanimous affirmative vote of all of the Holders will be required to adopt any action or resolution if such action or resolution to be taken would effect any of the changes referred to in clauses (i) to (vi) of the first paragraph under “—Modification of the indenture; Waiver of Covenants.” In all other cases resolutions will be adopted by the affirmative vote of a majority of the Holders present or represented at any meeting computed on the basis of the principal amount of the outstanding notes held by such persons.

Except as provided above, any modifications, amendments, or waivers to the terms and conditions of the notes will be conclusive and binding on all Holders, whether or not they have given such consent or were present at any meeting of Holders, and whether or not notation of such modifications, amendments or waivers is made upon the notes.

Notices

Notices to Holders will be deemed to be validly given if (i) mailed to the registered address of Holders as provided in the Register and (ii) published in a leading daily newspaper of general circulation in Luxembourg, which is expected to the Luxemburger Wort so long as the notes are listed on the Luxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange so require. Any notice so given will be deemed to have been validly given on the date of such publication (or, if published more than once, on the date of the first publication). Notices to the trustee will be deemed to be validly given upon actual receipt. The Company may choose to publish notices on the website of the Luxembourg Stock Exchange. So long as the notes are Global Notes, notices provided to the depository shall be considered given to the Holders.

Prescription

Claims in respect of principal and interest shall be prescribed unless made within a period of 10 years in the case of principal and five years in the case of interest from the relevant payment date.

Governing Law and Submission to Jurisdiction

THE INDENTURE AND THE NOTES WILL BE GOVERNED BY, AND WILL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

151 For the benefit of the Holders, the Company has irrevocably submitted to the jurisdiction of any New York State or U.S. federal court sitting in the Borough of Manhattan, City of New York solely for the purposes of any suit, action or proceeding arising out of or related to the indenture or the notes and the Company has appointed NRAI-National Registered Agents, Inc. as its authorized agent upon which process may be served in any such suit, action or proceeding.

To the extent that the Company may in any jurisdiction claim for itself or its assets immunity from a suit execution, attachment (whether in aid of execution, before judgment or otherwise) or other legal process and to the extent that in any such jurisdiction there may be attributed to itself or its assets such immunity (whether or not claimed), the Company irrevocably agrees for the benefit of the Holders not to claim, and irrevocably waives, such immunity to the full extent permitted by the laws of such jurisdiction.

Currency Indemnity

The Company agrees that, if a judgment or order given or made by any court for the payment of any amount in respect of any notes is expressed in a currency (the “judgment currency”) other than U.S. dollars (the “denomination currency”), it will indemnify the relevant Holder against any deficiency arising or resulting from any variation in rates of exchange between the date as of which the denomination currency in notionally converted into the judgment currency for the purposes of such judgment or order and the date of actual payment thereof. This indemnity will constitute a separate and independent obligation from the other obligations of the Company under the indenture, will give rise to a separate and independent cause of action, will apply irrespective of any indulgence granted from time to time and will continue in full force and effect notwithstanding any judgment or order for a liquidated sum or sums in respect of amounts due in respect of the relevant note or under any such judgment or order. Any such loss or damage will be deemed to constitute a loss suffered by the relevant Holder and no proof or evidence or loss will be required.

Certain Definitions

“Adjusted EBITDA” means net income before financial expenses, net, income tax and social contribution, depreciation and amortization and other operating income (expenses), net.

“Adjusted Total Debt” means, as of any date of determination, (a) our total (i) indebtedness for borrowed money or for the deferred purchase price of property or services, excluding trade payables and other accrued current liabilities arising in the ordinary course of business; (ii) obligations evidenced by bonds, notes, debentures, letters of credit or similar instruments; and (iii) guarantees of the types of indebtedness set forth in (i) and (ii) above, (b) less accrued interest and finance charges.

“Adjusted Shareholders’ Equity” means, with respect to any Person, as of any date of determination, Shareholders’ Equity of such Person less the sum of: (i) an amount equal to the aggregate amount of overdue accounts receivable from the Controlling shareholder of such Person and all Bulk Water Customers of such Person included on the consolidated balance sheet of such Person and its Subsidiaries, net of any reserve in respect of such accounts receivable and (ii) the value of any Capital Stock referred to in the proviso to clause (v) of the definition of “Indebtedness” to the extent included in the assets of such Person and its Subsidiaries, in each case determined on a consolidated basis in accordance with Brazilian GAAP as of the last day of the most recent fiscal quarter of such Person ending on or prior to such date of determination.

“Affiliate” means, with respect to any Person, any other Person directly or indirectly Controlling or Controlled by or under direct or indirect common Control with such specified Person; provided, however, that for purposes of the indenture, Brazil shall not be considered an Affiliate of the Company or any of its Subsidiaries.

“Brazilian Corporate Law” means Brazilian Federal Law No. 6,404, of December 15, 1976, as amended.

“Brazilian GAAP” means generally accepted accounting principles set forth in the Brazilian Corporate Law and in the regulations issued by the CVM, as in effect from time to time.

152 “Bulk Water Customer” means, with respect to any Person, any other Person that purchases water on a bulk basis from the first Person or any of its Subsidiaries and for which neither the first Person nor any of its Subsidiaries provides the service of distributing such water to end-users.

“Business Day” means a day other than a Saturday, a Sunday or a day on which banking institutions in the City of New York, São Paulo, Brazil and Luxembourg are not required to be open.

“Capital Lease Obligation” means, with respect to any Person, any obligation of such Person under any lease for real or personal property which, in accordance with Brazilian GAAP, is required to be recorded as a capitalized lease obligation; and, for the purpose of the indenture, the amount of such obligation at any date shall be the capitalized amount thereof at such date, determined in accordance with Brazilian GAAP.

“Capital Stock” in any Person means any and all shares, interests, participations or other equivalents or interests in (however designated) capital stock in such Person, including, with respect to a corporation, common stock, Preferred Stock and other corporate stock and, with respect to a partnership, partnership interests, whether general or limited, and any rights to receive shares of the profits and losses of, or distributions of assets of, the issuing Person.

“Concession” means a concession granted to or held by the Company from a municipality to provide water or sewage services within such municipality.

“Consolidated Interest Expense” means, with respect to any Person, as of any date of determination, the sum of the following items for the four most recent consecutive fiscal quarters ending on or prior to such date of determination, without duplication: (i) consolidated paid and accrued interest expense of such Person for such period and (ii) any other expenses related to the Adjusted Total Debt of such Person for such period.

“Control” when used with respect to any specified Person means the power to direct the management and policies of such Person directly or indirectly, whether through ownership of voting securities (or pledge of voting securities if the pledgee thereof may on the date of determination exercise or control the exercise of the voting rights of the owner of such voting securities), by contract or otherwise; and the terms “to Control,” “Controlling” and “Controlled” have meanings correlative to the foregoing.

“Debt Service Coverage Ratio” means, with respect to any person, the ratio of Adjusted EBITDA for such Person to the Consolidated Interest Expense for such Person, in each case for the four most recent consecutive fiscal quarters ending on or prior to the date of determination. In the event that such Person incurs or redeems any Indebtedness subsequent to the commencement of the period for which the Debt Service Coverage Ratio is being calculated but prior to the date of the event for which the calculation of the Debt Service Coverage Ratio is made (the “Calculation Date”) then the Debt Service Coverage Ratio shall be calculated giving pro forma effect to such Incurrence or redemption of Indebtedness, as if the same had occurred at the beginning of the applicable four- quarter period, including the assumption of investment returns at the rate equal to the higher of the SELIC Rate or any successor thereto or six-month LIBOR at the beginning of such four-quarter period. For the purposes of making the computation referred to above, investments in the equity of, or other acquisitions or dispositions, which constitute all or substantially all of an operating unit of a business and discontinued operations (as determined in accordance with Brazilian GAAP) that have been made by such Person or any of its Subsidiaries, including all mergers, consolidations and dispositions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be calculated on a pro forma basis assuming that all such investments, acquisitions, dispositions, discontinued operations, mergers and consolidations (and the reduction of any associated fixed charge obligations and the change in Adjusted EBITDA resulting therefrom) had occurred on the first day of the four-quarter period. If since the beginning of such period any Person (that subsequently became a Subsidiary or was merged with or into such Person or any Subsidiary since the beginning of such period) shall have made an investment in the equity of, or other acquisition or disposition, which constitutes all or substantially all of an operating unit of a business, discontinued operation, merger or consolidation that would have required adjustment pursuant to this definition, the Debt Service Coverage Ratio shall be calculated giving pro forma effect thereto for such period as if such investment, acquisition, disposition, discontinued operation, merger or consolidation had occurred at the beginning of the applicable four-quarter period. For purposes of this definition, whenever pro forma effect is to be given to a transaction, the pro forma calculations shall be made in good faith by a

153 responsible financial or accounting officer of the Company. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest on such Indebtedness shall be calculated as if the rate in effect on the Calculation date had been the applicable rate for the entire period. Interest on a Capital Lease Obligation shall be deemed to accrue at an interest rate implicit in such Capital Lease Obligation in accordance with Brazilian GAAP. Interest on Indebtedness that may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rate, shall be deemed to have been based upon the rate actually chosen, or, if none, then based upon such optional rate as the Company shall choose.

“Default” means an event or condition the occurrence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.

“Definitive Note” means a certificated note in definitive, fully registered form, without interest coupons.

“Disqualified Capital Stock” means any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part on, or prior to, or is exchangeable for debt securities of the Company or its Subsidiaries prior to, the final Stated Maturity of principal of the notes; provided that only the amount of such Capital Stock that is redeemable prior to the Stated Maturity of principal of the notes shall be deemed to be Disqualified Capital Stock.

“FEHIDRO” means the Fundo Estadual de Recursos Hídricos.

“FESAN” means the Fundo Estadual de Saneamento.

“Fitch” means Fitch, Inc. and its successors.

“Guaranteed Indebtedness” means, with respect to any Person, without duplication, all Indebtedness of any other Person guaranteed, directly or indirectly, in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (i) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (ii) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss, (iii) to supply funds to, or in any other manner invest in, the debtor (including any agreement to pay for property or services without requiring that such property be received or such services be rendered), (iv) to maintain working capital or equity capital of the debtor, or otherwise to maintain the net worth, solvency or other financial condition of the debtor, or (v) otherwise to assure a creditor with respect to Indebtedness against loss, provided that such term shall not include endorsements of instruments for collection or deposit in the ordinary course of business.

“Holder” means a Person in whose name a note is registered in the Note Register.

“Incur” means create, issue, assume, guarantee, incur or in any other manner become liable for or with respect to, directly or indirectly; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary. The term “Incurrence” when used as a noun shall have a corresponding meaning. Notwithstanding the foregoing, a change in Brazilian GAAP that results in an obligation existing at the time of such change becoming Indebtedness shall not be deemed an Incurrence of such Indebtedness. The accretion of principal of a non-interest bearing security shall be deemed the Incurrence of Indebtedness.

“Indebtedness” means, with respect to any Person, without duplication, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, excluding any trade payables and other accrued current liabilities arising in the ordinary course of business, but including, without limitation, all obligations, contingent or otherwise, of such Person in connection with any letters of credit issued under letter of credit facilities which are outstanding for more than 30 days, and in connection with any agreement by such Person to purchase, redeem, exchange, convert or otherwise acquire for value any Capital Stock of such Person now or

154 hereafter outstanding, (ii) all obligations of such Person evidenced by bonds, notes, debentures or other similar instruments, (iii) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, but excluding trade payables arising in the ordinary course of business, (iv) all Capital Lease Obligations of such Person, (v) all indebtedness referred to in clauses (i) through (iv) above of other Persons and all dividends payable by other Persons, the payment of which is, in each case, secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien, upon or with respect to property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness (the amount of such obligations being deemed to be the lesser of the value of such property or asset or the amount of the obligations so secured), provided, however, that Indebtedness shall not include any such indebtedness of any such other Person if the only such Lien is upon the Capital Stock of such other Person, (vi) all guarantees by such Person of Guaranteed Indebtedness, (vii) all Disqualified Capital Stock (valued at the greater of book value and voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends) of such Person, and (viii) any amendment, supplement, modification, deferral, renewal, extension, refunding or refinancing of any liability of the types referred to in clauses (i) through (vii) above. For purposes hereof, (x) the “maximum fixed repurchase price” of any Disqualified Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to this indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value is to be determined in good faith by the board of directors (or any duly authorized committee thereof) of the issuer of such Disqualified Capital Stock, and (y) Indebtedness is deemed to be Incurred pursuant to a revolving credit facility each time an advance is made thereunder.

“Investment Grade” means BBB- or higher by S&P or Baa3 or higher by Fitch, or the equivalent of such global ratings by S&P or Fitch, or of another Rating Agency.

“Lien” means any mortgage, charge, pledge, lien (statutory or otherwise), security interest, hypothecation or other encumbrance upon or with respect to any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired.

“Permitted Liens” means and includes the following:

(i) any Lien on an asset in respect of Indebtedness Incurred solely for the purpose of financing all or any part of the cost of acquiring, developing, improving or constructing such asset (including Capital Stock of any Person); provided that any such Lien may attach only to such asset and may not exceed the cost of acquiring, developing or constructing such asset; and provided, further, that such Lien will attach concurrently or within 180 days of the acquisition, development, improvement or construction of such asset or any promise to acquire such asset;

(ii) any Lien securing Indebtedness Incurred in connection with a Project Financing; provided that the property over which such Lien is granted consists solely of (A) assets or revenues of the project for which the Indebtedness in connection with such Project Financing was Incurred and (B) shares or other equity interests of the project entity (including subordinated loans granted to such project entity by the Company or a Subsidiary, as shareholder of the project entity);

(iii) any Lien created directly or indirectly in connection with the raising of Indebtedness from (a) any multilateral or foreign government controlled development bank, (b) FEHIDRO, FESAN or any successor(s) thereto or any similar Brazilian entities that provide funds for similar purposes on similar terms and conditions or (c) any Brazilian federal governmental lender including (but not limited to) the Caixa Econômica Federal and Banco Nacional de Desenvolvimento Econômico e Social (BNDES) and Indebtedness Incurred to any other lender which lender has been funded by any such Brazilian Federal Government lender pursuant to customary Brazilian “repassing” arrangements;

(iv) any Lien granted or created in connection with any PPP Project;

155 (v) any Lien securing current taxes, assessments or other governmental charges which are not delinquent or remain payable without any penalty, or the validity of which is contested in good faith by appropriate proceedings;

(vi) any order of attachment or similar legal process arising in connection with appropriate proceedings; provided that the execution or other enforcement thereof has effectively been stayed and the claims secured thereby are being contested at the time in good faith by appropriate proceedings;

(vii) any Lien securing claims of mechanics, laborers, workmen, repairmen, materialmen, suppliers, carriers, warehousemen, landlords, mortgagees of landlords or vendors or other claims provided for by mandatory provisions of the laws of Brazil which are not yet due and delinquent, or are being contested in good faith by appropriate proceedings;

(viii) any Lien existing on the date of the issuance of the notes and any Lien created in accordance with “—Negative Pledge”;

(ix) any Lien on property existing prior to the acquisition of such property by the Company or any of its Subsidiaries; provided that no such Lien was created in connection with or in contemplation of such acquisition;

(x) any Lien arising solely by operation of law;

(xi) any Lien on any assets or property owned by any Subsidiary which Lien existed at the time of acquisition of the interest in such Subsidiary by the Company or any of its Subsidiaries (including by way of merger or consolidation or otherwise) and which Lien was not created in connection with or in anticipation of such acquisition;

(xii) any Lien arising out of the title retention provisions in connection with the purchase of goods and equipment in the ordinary course of business;

(xiii) any Lien (x) on deposits to secure, or any Lien otherwise securing, the performance of bids, trade contracts, commercial or equipment leases, statutory obligations, surety bonds, performance bonds and other obligations of like nature Incurred in the ordinary course of business or (y) securing the performance of bids or proposals for the acquisition of assets by the Company or its Subsidiaries;

(xiv) any Lien securing reimbursement obligations under letters of credit, guarantees and other forms of credit enhancement given in connection with the purchase of goods and equipment in the ordinary course of business;

(xv) any Lien granted in respect of Indebtedness that is exchangeable or convertible into shares of the Company or any of its Subsidiaries; provided that such Lien is only granted over the shares into which such Indebtedness is exchangeable or convertible;

(xvi) any Lien on any property resulting solely from the granting, performance or termination of a Concession;

(xvii) easements, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the business of the Company or any of its Subsidiaries;

(xviii) any interest or title of a lessor in property subject to any Capital Lease Obligation or operating lease;

156 (xix) any Lien on current and future accounts receivable due to the Company or any of its Subsidiaries securing Indebtedness Incurred by the Company or any of its Subsidiaries to finance working capital;

(xx) any Lien securing an extension, renewal or financing of Indebtedness secured by the Liens described in clauses (iii), (vii), (viii) and (x) secured by a Lien in a principal amount not greater than the original principal amount thereof; and

(xxi) any other Lien not described in clauses (i) through (xx), provided that at the time such Lien is created, Incurred or granted, the principal amount of Indebtedness secured by all Liens created, Incurred or granted in reliance on this clause (xxi) shall not exceed the greater of (x) U.S.$100,000,000 (or its equivalent in other currencies) and (y) 1.00% of Adjusted Shareholders’ Equity.

For the purpose of the foregoing, property of a party to a merger or consolidation or to which the Company or a Subsidiary sells all or substantially all of its assets which is not the Company or a then Subsidiary, shall be deemed “acquired” by the Company or Subsidiary (even if the Company or a Subsidiary, as the case may be, is not the Surviving Entity) at time such merger or consolidation or sale occurs.

“Person” means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivisions thereof.

“PPP Project” means a transaction entered under Brazilian federal law n.°11.079, of December 30, 2004 and/or state law n.° 11.688, of May 19, 2004 (so-called public-private partnerships, “PPP”) that (x) is in accordance with the Company’s investment budget, (y) is solely for the purpose of operating assets which are closely related to the performance of the Company’s main corporate purpose and investments in developing, improving or constructing, which are related to the services rendered in connection with the project; and (z) is reasonably expected to provide economic benefit to the Company, which transaction has been appraised by a well-known third- party appraiser and approved by the Company prior to its commitment to enter into the transaction.

“Preferred Stock” means, with respect to any Person, any Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary liquidation or dissolution of such Person, over Capital Stock of any other class in such Person.

“Project Financing” means any financing of all or part of the costs of the acquisition, construction or development of any project provided that the Person or Persons providing such financing expressly agree to limit their recourse to the project financed (which may include a pledge over the shares or other equity interests of the project entity, including subordinated loans granted to such project entity by the Company or a Subsidiary, as shareholder of the project entity) and the revenues derived from such project as the only source of repayment for the monies advanced subject to limited project sponsor recourse in accordance with generally accepted project finance practice in similar projects.

“Rating Agency” means (i) S&P, (ii) Fitch or (iii) if neither S&P nor Fitch is rating the notes, another internationally recognized rating agency.

“Sale and Leaseback Transaction” means any direct or indirect arrangement, or series of related arrangements, with any Person (other than the Company or a Subsidiary of the Company) or to which any Person (other than the Company or a Subsidiary of the Company) is a party, providing for the leasing to the Company or to a Subsidiary of the Company of any property for an aggregate term exceeding three years, whether owned by the Company or by any Subsidiary of the Company at the issue date or later acquired, which has been or is to be sold or transferred by the Company or such Subsidiary of the Company to such Person or to any other Person from whom funds have been or are to be advanced by such Person on the security of such property.

157 “Securities Act Legend” means the legend, set forth in the indenture, which appears on the face of a Restricted Global Note or note issued in exchange therefor.

“S&P” means Standard & Poor’s Ratings Group, a division of McGraw Hill, Inc. and its successors.

“SELIC Rate” means the rate of interest calculated from time to time by the Sistema Especial de Liquidação e Custódia as the average of social market interest rate and published from time to time by the Central Bank.

“Shareholders’ Equity” of any Person means shareholders’ equity of such Person and its Subsidiaries determined on a consolidated basis in accordance with Brazilian GAAP.

“Significant Subsidiary” means, with respect to any Person, any consolidated Subsidiary of such Person for which the revenue or net income of such Subsidiary was more than 10% of the consolidated revenue of such Person in the prior fiscal years.

“Stated Maturity” when used with respect to any Indebtedness (including, without limitation, the notes) means the date specified in the instrument governing such Indebtedness as the fixed date on which any principal amount of such Indebtedness is due and payable (including, without limitation, by reason of any required redemption, purchase, defeasance or sinking fund payment) and, when used with respect to any installment of interest on Indebtedness, means the date on which such installment is due and payable.

“Subsidiary” means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the voting power of Voting Stock thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of such Person or a combination thereof.

“Voting Stock” means Capital Stock of the class or classes of which the holders have (i) in respect of a corporation, the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of such corporation (irrespective of whether or not at the time Capital Stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency) or (ii) in respect of any other Person, the general voting power under ordinary circumstances to elect the board of directors or other governing board of such Person or other Person that controls such Person.

“Western Europe” means Austria, Belgium, Denmark, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom and Northern Ireland.

Book-Entry; Delivery and Form

Notes offered and sold to qualified institutional buyers pursuant to Rule 144A will be issued in the form of one or more registered notes in global form, without interest coupons (collectively, the “Restricted Global Notes”). Notes offered and sold in offshore transactions to non-U.S. Persons in reliance on Regulation S will initially be issued in the form of one or more registered notes in global form, without interest coupons (collectively, the “Regulation S Global Note”). Prior to the expiration of the later of the 40th day after the later of the commencement of the offering of the notes and the issue date (such period through and including such 40th day, the “Restricted Period”) transfers by an owner of a beneficial interest in the Regulation S Global Note to a transferee who takes delivery of such interest through the Restricted Global Note may be made only in accordance with applicable procedures and the certification requirements set forth in the indenture. The Restricted Global Note and the Regulation S Global Note (hereinafter referred to, collectively, as the “Global Notes”) will be deposited with a custodian for DTC and registered in the name of a nominee of DTC. The Global Notes (and any notes issued in exchange therefor) will be subject to certain restrictions on transfer described under “—Registration, Transfer and Exchange of Notes.”

The notes will be issued only in fully registered form, without exception, in denominations of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof. No service charge will be made for any

158 registration of transfer or exchange of notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

DTC has advised the Company as follows: DTC is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities of institutions that have accounts with DTC (“Agent Members”) and to facilitate the clearance and settlement of securities transactions among Agent Members in such securities through electronic book-entry changes in accounts of Agent Members, thereby eliminating the need for physical movement of securities certificates. Agent Members include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Access to DTC’s book-entry system is also available to others such as brokers, dealers, banks and trust companies that clear through or maintain a custodial relationship with an Agent Member, whether directly or indirectly.

Upon the issuance of the Global Notes, DTC or its custodian will credit, on its book-entry registration and transfer system, to the accounts of Agent Members their respective beneficial interests in the principal amount of notes represented by each such Global Note. Such accounts initially will be designated by or on behalf of the Initial Purchaser. Ownership of beneficial interests in a Global Note will be limited to Agent Members or persons who hold interests through Agent Members. Ownership of beneficial interests in the Global Note will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC (with respect to Agent Members’ interests) and records of Agent Members (with respect to interests of persons other than Agent Members). The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such laws may impair the ability to transfer or pledge beneficial interests in a Global Note.

So long as DTC, or its nominee, is the registered Holder and owner of a Global Note, DTC or such nominee, as the case may be, will be considered the sole legal owner and holder of the notes represented by such Global Note for all purposes of such notes and indenture. Except as set forth below, owners of beneficial interests in a Global Note will not be entitled to have the notes represented by the Global Note registered in their names, will not receive or be entitled to physical delivery of notes in definitive form and will not be considered to be the owners or Holders of any notes represented by the Global Note. The Company understands that under existing industry practice, in the event an owner of a beneficial interest in a Global Note desires to take any action that DTC, as the Holder of the Global Note, is entitled to take, DTC would authorize the Agent Members to take such action, and that the Agent Members would authorize owners of beneficial interests to take such action or would otherwise act upon the instructions of the owners.

Investors may hold their interests in the Regulation S Global Note directly through the Euroclear or Clearstream, if they are participants in such systems, or indirectly through organizations which are participants in such systems. After the Restricted Period, investors may also hold such interests through organizations other than Euroclear and Clearstream that are Agent Members. Euroclear and Clearstream will hold such interests in the Regulation S Global Note on behalf of their participants through customer securities accounts in their respective names on the books of their respective depositories, which in turn will hold such interests in the Regulation S Global Note in customer securities accounts in the respective depositories’ names on the books of DTC.

Payment of principal of and interest on the notes represented by a Global Note registered in the name of and held by DTC or its nominee will be made to DTC or its nominee, as the case may be, as the registered owner and Holder of the Global Note.

The Company expects that DTC or its nominee, upon receipt of any payment of principal or interest in respect of a Global Note, will immediately credit the accounts of Agent Members with payments in the amounts proportionate to their respective beneficial interests in the principal amount of such Global Note as shown on the records of DTC or its nominee. The Company also expects that payments by Agent Members to owners of beneficial interests in such Global Note held through such Agent Members will be governed by standing instructions and customary practices, as is now the case with securities held for accounts of customers registered in the names of nominees for such customers. The Company will have no responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in a Global Note in respect of any note

159 or for maintaining, supervising or reviewing any record relating to such beneficial ownership interests or for any other aspect of the relationship between DTC and the Agent Members or the relationship between the Agent Members and the owners of such beneficial interests.

Transfers between Agent Members will be effected in the ordinary way in accordance with the applicable procedures of DTC and will be settled in same-day funds. Transfers between participants in Euroclear and Clearstream will be effected in the ordinary way in accordance with their respective rules and operating procedures.

Although DTC, Euroclear and Clearstream are expected to follow the foregoing procedures in order to facilitate transfers of interests in the Regulation S Global Note and in the Restricted Global Note among participants of DTC, Euroclear and Clearstream, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Trustee nor the Company will have any responsibility for the performance by DTC, Euroclear or Clearstream or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

160 TAXATION

The following discussion summarizes certain Brazilian, U.S. federal income and European Union tax considerations that may be relevant to you if you invest in the notes. This summary is based on laws, regulations, rulings and decisions now in effect in Brazil and the United States, and a directive of the European Union, in each case which may change. Any change could apply retroactively and could affect the continued validity of this summary.

This summary does not describe all of the tax considerations that may be relevant to you or your situation, particularly if you are subject to special tax rules. You should consult your tax advisors about the tax consequences of holding the notes, including the relevance to your particular situation of the considerations discussed below, as well as of state, local and other tax laws.

Brazilian Taxation

The following discussion is a general description of certain Brazilian tax aspects of the notes applicable to a holder of the notes that is an individual, entity, trust or organization resident or domiciled outside Brazil for tax purposes (“Non-Resident Holder”) and does not purport to be a comprehensive description of the tax aspects of the notes. The earnings of foreign companies and persons not resident in Brazil are generally taxed in Brazil when (i) paid, credited or otherwise received from Brazilian sources; (ii) the transaction giving rise to such earnings involves assets in Brazil; or (iii) the transaction giving rise to such earnings is carried out with persons and companies resident or domiciled in Brazil.

Investors should note that, as to the discussion below, other income tax rates or treatment may be provided for in any applicable tax treaty between Brazil and the country where the Non-Resident Holder is domiciled. This summary does not address any tax issues that affect solely the company, such as deductibility of expenses.

Interest Payment Under the Notes

Interest (including original issue discount) payable by us to a Non-Resident Holder is generally subject to withholding income tax at the rate of 15%, unless some other lower rate is provided for in a tax treaty between Brazil and the country where the Non-Resident Holder is domiciled. The withholding income tax rate remains 15% in the event of interest income payable by a Brazilian obligor to an individual, company, trust or organization domiciled outside Brazil in respect of debt obligations resulting from the issuance by a Brazilian issuer of international debt securities previously registered with the Central Bank, including commercial paper, as provided for in Section 10 of Normative Instruction no. 252, dated December 3, 2002 issued by the Brazilian Revenue Service).

In the event that we are required to make any payment under the notes to a Non-Resident Holder, we will be allowed under Brazilian tax laws to pay such additional amounts as may be necessary to ensure that the net amounts receivable by the Non-Resident Holder after withholding taxes will equal the amounts that would have been payable in the absence of such withholding.

Capital Gains

Capital gains generated outside Brazil as a result of a transaction between two non-residents of Brazil with respect to assets located in Brazil are subject to income tax in Brazil, according to Article 26 of Law No. 10,833, enacted on December 29, 2003.

Although we believe that the notes do not fall within the definition of assets located in Brazil for purposes of Law No. 10,833/03, since they will be listed overseas on the Luxembourg Stock Exchange and traded on the Euro MTF Market, considering the broad and unclear scope of this legislation and the absence of judicial guidance in respect thereof, we are unable to predict how Law No. 10,833/03 would be interpreted in the Brazilian courts. If such courts were to determine that the notes constitute assets located in Brazil, gains realized by a Non-Resident Holder from the sale or other disposition of the notes to a Brazilian resident or even to a non-Brazilian resident

161 would be subject to income tax in Brazil at a rate of 15% (or 25% if such Non-Resident Holder is located in a country or jurisdiction (a) which does not impose any income tax, (b) which imposes an income tax at a maximum rate of less than 20% or (c) where the laws of such jurisdiction impose restrictions on access to shareholding composition or to the beneficial owner of the income (a “Low or Nil Tax Jurisdiction”).

Law No. 11,727 also introduced the concept of “privileged tax regime,” which is considered to be a regime that (i) does not tax income or taxes income at a maximum rate lower than 20%; (ii) grants tax advantages to a non- resident entity or individual (a) without the need to carry out a substantial economic activity in the country or dependency or (b) conditioned on the non-exercise of a substantial economic activity in the country or dependency; (iii) does not tax income generated outside the jurisdiction, or that taxes such income at a maximum rate lower than 20%; or (iv) restricts access to information related to shareholding composition, ownership of goods and rights or the economic transactions carried out.

The following have been listed as “privileged tax regimes” pursuant to Normative Instruction No.1,037/10: (i) with reference to the legislation of Luxembourg, the regime applicable to the legal entities organized as holding companies; (ii) with reference to the legislation of Uruguay, the regime applicable to legal entities organized as Sociedades Financeiras de Inversão (“SAFIS”) until December 31, 2010; (iii) with reference to the legislation of Denmark, the regime applicable to legal entities organized as holding companies that do not carry out a substantial economic activity; (iv) with reference to the legislation of Iceland, the regime applicable to legal entities organized as an International Trading Company (“ITC”); (v) with reference to the legislation of Hungary, the regime applicable to legal entities organized as offshore KFT; (vi) with reference to the legislation of the United States, the regime applicable to Limited Liability Companies (“LLC”) owned by non-residents and not subject to federal income tax; (vii) with reference to the legislation of Spain, the regime applicable to legal entities organized as Entidad de Tenencia de Valores Extrangeros (“E.T.V.E.”); and (viii) with reference to the legislation of Malta, the regime applicable to legal entities organized as an International Trading Company (“ITC”) and as an International Holding Company (“IHC”).

The sections of Law No. 11,727/08 that refer to the “privileged tax regime” became effective as of January 1, 2009. Although we are of the opinion that the concept of privileged tax regime should not affect the tax treatment of a Non-Resident Holder described above since it will only be applied for the purposes of complying with transfer pricing rules in connection with import and export transactions, we cannot assure you whether subsequent legislation or interpretations by the Brazilian tax authorities regarding the definition of privileged tax regime will extend such concept to the tax treatment of a Non-Resident Holder described above.

Other Tax Considerations

Pursuant to Decree No. 6,306, of December 14, 2007 (as amended from time to time), conversion into Brazilian currency of proceeds received in foreign currency by a Brazilian entity and the conversion into foreign currency of proceeds received in Brazilian currency are subject to the tax on foreign exchange transactions (“IOF/Exchange”). Currently, as a general rule, the rate of IOF/Exchange is 0.38%. However, the IOF/Exchange related to payments under notes with an average term of more than 90 days is zero percent. The Brazilian government can increase such rate at any time up to a rate of 25%, but only with respect to future foreign exchange transactions. On the other hand, if the notes are redeemed within 90 days of their issuance, the applicable IOF/Exchange tax payable by us for the conversion of the proceeds received in foreign currency into Brazilian currency would increase to a rate of 5.38% plus interest and penalties.

Decree No. 7,330/2010 increased from 4% to 6% the IOF/Exchange levied on exchanges of foreign currency into reais for purposes of investing either in the capital markets, or in the financial markets (entry). Nonetheless, since the notes will be listed overseas on the Luxembourg Stock Exchange and traded on the Euro MTF Market, we do not believe that such IOF/Exchange would be applicable.

Generally, there are no stamp, transfer or other similar taxes in Brazil applicable to the transfer, assignment or sale of the notes outside Brazil, nor any inheritance, gift or succession tax applicable to the ownership, transfer or disposition of the notes, except for gift and inheritance taxes imposed in some states of Brazil on gifts and bequests by a Non-Resident Holder to individuals or entities domiciled or residing within such Brazilian states.

162 The above description is not intended to constitute a complete analysis of all Brazilian tax consequences relating to the ownership of notes. Prospective purchasers of notes should consult their own tax advisors concerning the tax consequences of their particular situations.

European Union Savings Directive (Directive 2003/48/EC)

Under EC Council Directive 2003/48/EC on the taxation of savings income (“Savings Directive”) Member States are required to provide to the tax authorities of another Member State details of payments of interest (or similar income) paid by a person within its jurisdiction to an individual resident in that other Member State or to certain limited types of entities established in that other Member State. However, for a transitional period, Belgium, Luxembourg and Austria may instead (unless during that period they elect otherwise) impose a withholding system in relation to such payments (the ending of such transitional period being dependent upon the conclusion of certain other agreements relating to information exchange with certain other countries). A number of non-EU countries and territories including Switzerland have adopted similar measures (a withholding system in the case of Switzerland).

On September 15, 2008, the European Commission issued a report to the Council of the European Union on the operation of the Savings Directive, which included the Commission’s advice on the need for changes to the Savings Directive. On November 13, 2008, the European Commission published a more detailed proposal for amendments to the Savings Directive, which included a number of suggested changes. The European Parliament approved an amended version of this proposal on April 24, 2009. If any of those proposed changes are made in relation to the Savings Directive, they may amend or broaden the scope of the requirements described above. Investors are advised to consult their independent professional advisers in relation to the implications of the proposed changes, once finally made.

U.S. Federal Income Taxation

Internal Revenue Service Circular 230 Disclosure

Pursuant to Internal Revenue Service Circular 230, we hereby inform you that the description set out herein with respect to U.S. federal tax issues is not intended or written to be used, and such description cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed on the taxpayer under the U.S. Internal Revenue Code of 1986, as amended (“Code”). Such description was written in connection with the promotion or marketing of the notes. Taxpayers should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

The following is a general summary of certain U.S. federal income tax consequences of the acquisition, ownership and disposition of notes by a holder thereof. This description only applies to notes held as capital assets, as defined in the United States federal tax laws, and does not address, except as set forth below, aspects of U.S. federal income taxation that may be applicable to holders that are subject to special tax rules, such as:

 financial institutions;

 insurance companies;

 real estate investment trusts;

 regulated investment companies;

 grantor trusts;

 tax-exempt organizations;

 persons that will own notes through partnerships or other pass-through entities;

 dealers or traders in securities or currencies;

163  certain former citizens or long-term residents of the United States;

 holders that will hold a note as part of a position in a straddle or as part of a hedging, conversion or integrated transaction for U.S. federal income tax purposes; or

 holders that have a functional currency other than the U.S. dollar.

Moreover, this summary does not address the U.S. federal estate and gift tax or alternative minimum tax consequences of the acquisition, ownership or disposition of notes and does not address the U.S. federal income tax treatment of holders that do not acquire notes as part of the initial issuance at their initial offering price. Each prospective purchaser should consult its tax advisor with respect to the U.S. federal, state, local and non-U.S. tax consequences of acquiring, owning and disposing of notes.

This summary is based on the Internal Revenue Code of 1986, as amended, (“Code”), its legislative history, existing and proposed U.S. Treasury Regulations, published administrative pronouncements and judicial decisions, each as available and as of the date hereof. All of the foregoing are subject to change at any time, possibly with retroactive effect, or differing interpretations which could affect the tax consequences described herein. No assurances can be given that any changes in these laws or authorities will not affect the accuracy of the discussion set forth in this summary.

This summary is not intended to constitute a complete analysis of all tax consequences relating to the ownership of notes. Prospective purchasers of notes should consult their own tax advisors concerning the tax consequences of their particular situations.

For purposes of this summary, a U.S. Holder is a beneficial owner of notes who for U.S. federal income tax purposes is any of the following:

 an individual citizen or resident of the United States;

 a corporation (or any other entity that is treated as a corporation for U.S. federal income tax purposes) organized in or under the laws of the United States or any state thereof, or the District of Columbia;

 an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

 a trust (1) that validly elects to be treated as a U.S. person for U.S. federal income tax purposes or (2)(a) if a court within the United States is able to exercise primary supervision over the administration of that trust and (b) one or more U.S. persons have the authority to control all substantial decisions of that trust.

A Non-U.S. Holder is a beneficial owner of notes that is neither a U.S. Holder nor a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes).

If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds notes, the tax treatment of the partnership and a partner in such partnership generally will depend on the status of the partner and the activities of the partnership.

Interest

U.S. Holders

It is expected and this discussion assumes that either the issue price of the notes will equal the stated principal amount of the notes or the notes will be issued with less than a de minimis amount of original issue discount (“OID”). Therefore, if you are a U.S. Holder, interest paid to you on a note, including any additional amounts with respect thereto as described under “Description of Notes — Additional Amounts,” will be includible in your gross income as ordinary interest income in accordance with your usual method of tax accounting. In

164 addition, interest on the notes will be treated as foreign source income for U.S. federal income tax purposes. Subject to certain conditions and limitations, foreign taxes, if any, withheld on interest payments may be treated as foreign taxes eligible for credit against your U.S. federal income tax liability. The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect to specific “baskets” of income. Interest on the notes generally will constitute “passive category income,” or, in the case of certain U.S. Holders, “general category income”. As an alternative to the tax credit, a U.S. Holder may elect to deduct such taxes (the election would then apply to all foreign income taxes such U.S. Holder paid in that taxable year). The rules governing the foreign tax credit are complex.

The notes are not redeemable except in certain circumstances (see generally “Description of the Notes”). In addition, we may be required to purchase all or any portion of a Holder’s notes upon the occurrence of a Change of Control that results in a Ratings Decline at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest thereon and any Additional Amounts payable with respect thereto, as described under “Description of the Notes—Purchase of Notes Upon Change of Control Event. Under the U.S. Treasury Regulations regarding notes issued with OID, if, based on all the facts and circumstances as of the date on which the notes are issued, there is a remote likelihood that a contingent redemption option will be exercised, it is assumed that such redemption will not occur and such option will not cause the notes to be treated as contingent payment debt instruments (“CPDIs”). We believe that, as of the expected issue date of the notes, the likelihood of such events is for this purpose remote. Our determination is not binding on the U.S. Internal Revenue Service (“IRS”), and if the IRS were to challenge this determination, you may be required to accrue income on the notes that you own in excess of stated interest, and to treat as ordinary income rather than capital gain any income realized on the taxable disposition of such notes before the resolution of the contingency. In the event that such contingency were to occur, it would affect the amount and timing of the income that you recognize. The remainder of this discussion assumes that the notes will not be treated as CPDIs.

Non-U.S. Holders

Subject to the discussion below under the caption “— U.S. backup withholding and information reporting,” if you are a Non-U.S. Holder, payments to you of interest on a note generally will not be subject to U.S. federal income tax, including withholding tax, unless the income is effectively connected with your conduct of a trade or business in the United States (and, if a tax treaty applies, is attributable to a permanent establishment in the United States).

Sale, Exchange, Retirement or Other Disposition

U.S. Holders

If you are a U.S. Holder, upon the sale, exchange, retirement or other disposition of a note, you will recognize taxable gain or loss equal to the difference, if any, between the amount realized on the sale, exchange, retirement or other disposition (other than accrued but unpaid interest which will be taxable as interest) and your adjusted tax basis in the note. Your adjusted tax basis in a note generally will equal the cost of the note to you, and any such gain or loss will generally be capital gain or loss. If you are a non-corporate U.S. Holder, under current law, the maximum marginal U.S. federal income tax rate applicable to the gain will be lower than the maximum marginal U.S. federal income tax rate applicable to ordinary income (other than certain dividends) if your holding period for the notes exceeds one year (that is, such gain is long-term capital gain). Any gain or loss realized on the sale, exchange, retirement or other disposition of a note generally will be treated as U.S. source gain or loss, as the case may be. Consequently, you may not be able to claim a credit for any Brazilian or other foreign tax imposed upon a disposition of a note unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from foreign sources. The deductibility of capital losses is subject to limitations.

Non-U.S. Holders

Subject to the discussion below under the caption “— U.S. backup withholding and information reporting,” if you are a Non-U.S. Holder, any gain realized by you upon the sale, exchange, retirement or other disposition of a note generally will not be subject to U.S. federal income tax, unless:

165  the gain is effectively connected with your conduct of a trade or business in the United States (and, if a tax treaty applies, is attributable to a permanent establishment in the United States); or

 if you are an individual Non-U.S. Holder, you are present in the United States for 183 days or more in the taxable year of the sale, exchange or retirement or other disposition and certain other conditions are met.

U.S. Backup Withholding and Information Reporting

Backup withholding and information reporting requirements apply to certain payments of principal of, and interest (including OID, if any) on, an obligation and to proceeds of the sale or redemption of an obligation, to certain holders of notes that are U.S. persons. Information reporting generally will apply to payments of principal of, and interest (including OID, if any) on, notes, and to proceeds from the sale or redemption of, notes within the United States, or by a U.S. payor or U.S. middleman, to a holder of notes that is a U.S. person (other than an exempt recipient). The payor will be required to backup withhold on payments made within the United States, or by a U.S. payor or U.S. middleman, on a note to a holder of a note that is a U.S. person, other than an exempt recipient, if the holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, the backup withholding requirements. Payments within the United States, or by a U.S. payor or U.S. middleman, of principal and interest to a holder of a note that is not a U.S. person will not be subject to backup withholding and information reporting requirements if an appropriate certification is provided by the holder to the payor and the payor does not have actual knowledge or a reason to know that the certificate is incorrect. The backup withholding rate is 28% for taxable years through 2010 (increasing to 31% for the 2011 taxable year and thereafter).

Backup withholding is not an additional tax. You generally will be entitled to credit any amounts withheld under the backup withholding rules against your U.S. federal income tax liability provided the required information is furnished to the IRS in a timely manner.

New Legislation

Recently enacted legislation requires certain U.S. Holders who are individuals, estates or trusts to pay a 3.8% tax on net investment income, including on interest and capital gains, for taxable years beginning after December 31, 2012. In addition, for taxable years beginning after March 18, 2010, new legislation requires certain U.S. Holders who are individuals to report information relating to an interest in our notes, subject to certain exceptions (including an exception for notes held in accounts maintained by certain financial institutions). U.S. Holders are urged to consult their tax advisors regarding the effect, if any, of new U.S. federal income tax legislation on their ownership and disposition of the notes.

166 CERTAIN ERISA AND OTHER CONSIDERATIONS

The discussion herein of the U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”), is general in nature and is not intended to be all inclusive. Any fiduciary of an ERISA plan, governmental plan, church plan, other benefit plan or other entity whose assets include plan assets subject to ERISA, Section 4975 of the Code or similar federal, state or local laws considering an investment in the notes should consult with its legal advisors regarding the consequences of such investment.

General

A fiduciary of an employee benefit plan subject to Title I of ERISA should consider fiduciary standards under ERISA in the context of the particular circumstances of such plan before authorizing an investment in the notes. Such fiduciary should consider ERISA’s diversification and prudence requirements and whether the investment is in accordance with the documents and instruments governing the plan and the fiduciary. In addition, ERISA and the Code prohibit a wide range of transactions (“Prohibited Transactions”) involving, on the one hand, the assets of a plan subject to ERISA or Section 4975 of the Code (including individual retirement accounts, individual retirement annuities and Keogh plans) or any entity in which such plan invests whose assets are deemed “plan assets” (each of the foregoing, an “ERISA Plan”) and, on the other hand, persons who have certain specified relationships to the ERISA Plan (“parties in interest,” within the meaning of ERISA, and “disqualified persons,” within the meaning of the Code). If not covered by a statutory or administrative exemption, Prohibited Transactions may require “correction” and may cause the ERISA Plan fiduciary to incur certain liabilities and the parties in interest or disqualified persons to be subject to civil penalties and excise taxes.

Governmental plans and certain church plans (each as defined under ERISA) are not subject to the prohibited transaction rules. Such plans may, however, be subject to substantially similar federal, state or local laws or regulations which may affect their investment in the notes. Any fiduciary of a governmental or church plan considering an investment in the notes should determine the need for, and the availability, if necessary, of any exemptive relief under such laws or regulations.

Prohibited Transactions

The acquisition or holding of notes by or on behalf of an ERISA Plan could be considered to give rise to a Prohibited Transaction. This would occur, if for example, we or any of our respective affiliates is or becomes a party in interest or a disqualified person with respect to such ERISA Plan. Before investing in the notes, any person who is, or who is acquiring the notes for, or on behalf of, an ERISA Plan must determine that the investment in, or acquisition of, the notes will not result in a Prohibited Transaction or that a statutory or administrative exemption from the prohibited transaction rules is applicable to the investment in the notes.

The statutory or administrative exemptions from the prohibited transaction rules under ERISA and the Code which may be available to an ERISA Plan which is investing in the notes include, without limitation: (i) PTCE 90-1, regarding investments by insurance company pooled separate accounts; (ii) PTCE 91-38, regarding investments by bank collective investment funds; (iii) PTCE 84-14, regarding transactions effected by qualified professional asset managers; (iv) PTCE 96-23, regarding transactions effected by in-house managers; (v) PTCE 95- 60, regarding investments by insurance company general accounts; and (vi) the statutory exemption under Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code for prohibited transactions between an ERISA Plan and a person or entity that is a party in interest to such ERISA Plan solely by reason of providing services to the ERISA Plan (other than a party in interest that is a fiduciary, or its affiliate, that has or exercises discretionary authority or control or renders investment advice with respect to the assets of the ERISA Plan involved in the transaction), provided that there is adequate consideration for the transaction (collectively referred to as the “ERISA Investor Exceptions”). The notes may not be acquired by any person who is, or who in acquiring such notes is using the assets of, an ERISA Plan unless such person is eligible for, and satisfies all requirements for relief under one of the ERISA Investor Exemptions or another applicable exemption, or such acquisition otherwise will not constitute or result in a non-exempt Prohibited Transaction. The acquisition of the notes by any person or entity who is, or who in acquiring such notes is using the assets of, an ERISA Plan or other plan shall be deemed to constitute a representation by such person or entity to us that the acquisition and holding of the notes will not constitute or result in a non-exempt Prohibited Transaction. Any person or entity who is, or who is acquiring such notes using the

167 assets of, a governmental, church, non-U.S. or other plan shall be deemed to constitute a representation by such person or entity to us that the acquisition and holding of such notes is not prohibited by any applicable federal, state, local or non-U.S. laws or regulations that are substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the Code.

168 NOTICE TO INVESTORS

The notes have not been and will not be registered under the Securities Act or any other applicable securities laws, and the notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S) except pursuant to transactions exempt from registration under the Securities Act. Accordingly, the notes are being offered and sold only:

● in the United States to qualified institutional buyers (as defined in Rule 144A) in reliance on Rule 144A under the Securities Act; and

● outside of the United States to non-U.S. persons in reliance upon Regulation S under the Securities Act.

Purchasers’ Representations and Restrictions on Resale and Transfer

Each purchaser of notes (other than the initial purchasers in connection with the initial issuance and sale of notes) and each owner of any beneficial interest therein will be deemed, by its acceptance or purchase thereof, to have represented, agreed and acknowledged as follows:

(1) It is purchasing the notes for its own account or an account with respect to which it exercises sole investment discretion, and it and any such account is either (a) a qualified institutional buyer and is aware that the sale to it is being made in reliance on Rule 144A or (b) a non-U.S. person that is outside the United States and it is not an affiliate of SABESP or a person acting on behalf of such an affiliate.

(2) It acknowledges that the notes have not been registered under the Securities Act or with any securities regulatory authority of any jurisdiction and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except as set forth below.

(3) It understands and agrees that notes initially offered in the United States to qualified institutional buyers will be represented by one or more global notes and that notes offered outside the United States in reliance on Regulation S will also be represented by one or more global notes.

(4) It will not resell or otherwise transfer any of such notes except (a) to SABESP, (b) within the United States to a person that it reasonably believes is a qualified institutional buyer in a transaction complying with Rule 144A under the Securities Act, (c) in an offshore transaction in compliance with Rule 903 or 904 of Regulation S, (d) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available) or (e) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States.

(5) It agrees that it will give to each person to whom it transfers the notes notice of any restrictions on transfer of such notes.

(6) It acknowledges that prior to any proposed transfer of notes (other than pursuant to an effective registration statement or in respect of notes sold or transferred either pursuant to (a) Rule 144A or (b) Regulation S and listed on the Luxembourg Stock Exchange) the holder of such notes may be required to provide certifications relating to the manner of such transfer as provided in the indenture.

(7) It acknowledges that the trustee, registrar or transfer agent for the notes will not be required to accept for registration transfer of any notes acquired by it, except upon presentation of evidence satisfactory to us and the trustee, registrar or transfer agent that the restrictions set forth herein have been complied with.

169 (8) Either that (a) it is not, and for so long as it holds the notes or interests in notes will not be, an ERISA Plan, an entity whose underlying assets include the assets of any such ERISA Plan or a governmental plan, church plan, non U.S. or other plan that is subject to any federal, state, local or non-U.S. law or regulation that is substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the Code or (b) its acquisition, holding or disposition of the notes or interests in notes will not constitute or result in a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code (or, in the case of a governmental plan, church plan or non- U.S. or other plan, a violation of any substantially similar federal, state, local or non-U.S law or regulation).

(9) It acknowledges that we, the initial purchasers and other persons will rely upon the truth and accuracy of the foregoing acknowledgements, representations and agreements and agrees that if any of the acknowledgements, representations and agreements deemed to have been made by its purchase of the notes are no longer accurate, it will promptly notify us and the initial purchasers. If it is acquiring the notes as a fiduciary or agent for one or more investor accounts, it represents that it has sole investment discretion with respect to each such account and it has full power to make the foregoing acknowledgements, representations and agreements on behalf of each account.

Legends

The following is the form of restrictive legend which will appear on the face of the Rule 144A global note, and which will be used to notify transferees of the foregoing restrictions on transfer:

“This security has not been registered under the United States Securities Act of 1933, as amended (“Securities Act”) or the securities laws of any state or other jurisdiction. Neither this security nor any interest or participation herein may be reoffered, sold, assigned, transferred, pledged, encumbered or otherwise disposed of in the absence of such registration or unless such transaction is exempt from, or not subject to, such registration.

The holder of this security by its acceptance hereof (1) represents that it is a “qualified institutional buyer” (as defined in Rule 144A under the Securities Act) purchasing this security for its own account or for the account of one or more qualified institutional buyers; (2) agrees to offer, sell or otherwise transfer such security, prior to the date (the “resale restriction termination date”) which is six months after the later of the original issue date hereof and the last date on which SABESP or any affiliate of SABESP was the owner of this security (or any predecessor of such security), only (a) to SABESP or any affiliate thereof, (b) pursuant to a registration statement that has been declared effective under the Securities Act, (c) for so long as the securities are eligible for resale pursuant to Rule 144A, to a person it reasonably believes is a “qualified institutional buyer,” that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) pursuant to offers and sales that occur outside the United States in compliance with Rule 903 or 904 under Regulation S under the Securities Act or (e) pursuant to another available exemption from the registration requirements of the Securities Act, in each case in accordance with all applicable securities laws of the states of the United States or any other applicable jurisdiction; and (3) agrees that it will deliver to each person to whom this security is transferred a notice substantially to the effect of this restrictive legend. This legend will be removed upon the request of the holder after the resale restriction termination date.”

The following is the form of restrictive legend which will appear on the face of the Regulation S global note and which will be used to notify transferees of the foregoing restrictions on transfer:

“This security has not been registered under the United States Securities Act of 1933, as amended (the “Securities Act”) or the securities laws of any state or other jurisdiction, and, accordingly, may not be offered or sold within the United States or to or for the account or benefit of U.S. persons except as set forth in the following sentence. By its acquisition hereof, the holder (1) represents that it is not a U.S. person, is not acquiring this security for the account or benefit of a

170 U.S. person and is acquiring this security in an offshore transaction, (2) by its acceptance hereof, agrees to offer, sell or otherwise transfer such security only (a) to SABESP or any affiliate thereof, (b) pursuant to a registration statement that has been declared effective under the Securities Act, (c) for so long as the securities are eligible for resale pursuant to Rule 144A under the Securities Act (“Rule 144A”) to a person it reasonably believes is a “qualified institutional buyer” as defined in Rule 144A that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that the transfer is being made in reliance on Rule 144A in a transaction meeting the requirements of Rule 144A, (d) pursuant to offers and sales that occur outside the United States in compliance with Rule 903 or 904 under Regulation S under the Securities Act or (e) pursuant to another available exemption from the registration requirements of the Securities Act, in each case in accordance with all applicable securities laws of the states of the United States or any other applicable jurisdiction, and (3) agrees that it will deliver to each person to whom this security is transferred a notice substantially to the effect of this restrictive legend. This legend will be removed after 40 consecutive days beginning on and including the later of (x) the day on which the securities are offered to persons other than distributors (as defined in Regulation S) and (y) the date of the closing of the original offering. As used herein, the terms “offshore transaction,” “United States” and “U.S. person” have the meanings given to them by Regulation S under the Securities Act.”

For further discussion of the requirements (including the presentation of transfer certificates) under the Indenture to effect exchanges or transfers of interest in global notes and certificated notes, see “Description of the Notes — Registration, transfer and exchange of notes”.

171 ENFORCEMENT OF CIVIL LIABILITIES

In the indenture relating to the notes, we will (1) agree that the courts of the State of New York and the federal courts of the United States, in each case sitting in the Borough of Manhattan, in the City of New York, will have jurisdiction to hear and determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with the notes and, for such purposes, irrevocably submit to the jurisdiction of such courts and (2) name an agent for service of process in the Borough of Manhattan, in the City of New York. See “Description of Notes―Governing Law and Submission to Jurisdiction”.

We have been advised by Felsberg, Pedretti, Mannrich e Aidar Advogados e Consultores Legais, our Brazilian counsel, that judgments of non-Brazilian courts for the payment of money, including for civil liabilities predicated upon the securities laws of countries other than Brazil, including the U.S. securities laws, subject to certain requirements described below, may be enforced in Brazil. A judgment for the payment of a sum certain against either us or any other person described above obtained outside Brazil would be enforceable in Brazil against us or any such person without reconsideration of the merits, upon confirmation of that judgment by the Brazilian Superior Court of Justice. That confirmation, generally, will occur if the foreign judgment:

● fulfills all formalities required for its enforceability under the laws of the country where the foreign judgment is granted;

● is issued by a competent court after proper service of process is made in accordance with Brazilian legislation;

● is not subject to appeal;

● is authenticated by a Brazilian consular office in the country where the foreign judgment is issued and is accompanied by a sworn translation into Portuguese; and

● is not contrary to Brazilian national sovereignty, public policy or public morality.

The confirmation process may be time-consuming and may also give rise to difficulties in enforcing the foreign judgment in Brazil. Accordingly, we cannot assure you that confirmation would be obtained, that the confirmation process would be conducted in a timely manner or that a Brazilian court would enforce a monetary judgment, including for violation of the securities laws of countries other than Brazil, including the U.S. securities laws.

A plaintiff (whether Brazilian or non-Brazilian) who resides outside Brazil during the course of litigation in Brazil must provide a bond to guarantee court costs and legal fees if the plaintiff owns no real property in Brazil that may ensure such payment. This bond must have a value sufficient to satisfy the payment of court fees and defendant’s attorneys’ fees, as determined by the Brazilian judge, except in the case of the enforcement of foreign judgments that have been duly confirmed by the Brazilian Superior Court of Justice.

We have been further advised by Felsberg, Pedretti, Mannrich e Aidar Advogados e Consultores Legais that (1) actions may be brought before Brazilian courts in connection with this offering memorandum based on the federal securities laws of the United States and that, subject to applicable law, Brazilian courts may enforce liabilities in such actions against us or our directors and officers and certain advisors named herein, provided that provisions of the federal securities laws of the United States do not contravene Brazilian public policy, national sovereignty or equitable principles and provided further that Brazilian courts can assert jurisdiction over such

172 actions; and (2) the ability of a judgment creditor or the other persons named above to satisfy a judgment by attaching certain assets of SABESP is limited by provisions of Brazilian law.

173 PLAN OF DISTRIBUTION

Banco Itaú Europa, S.A. – London Branch and Santander Investment Securities Inc. are acting as joint lead managers for the offering. Subject to the terms and conditions stated in the purchase agreement dated the date of this offering memorandum, each initial purchaser named below has severally agreed to purchase, and the issuer has agreed to sell to that initial purchaser, the principal amount of the notes set forth opposite the initial purchaser’s name.

Initial purchasers Principal amount of notes Banco Itaú Europa, S.A. – London Branch ...... US$175,000,000 Santander Investment Securities Inc...... US$175,000,000 Total ...... US$350,000,000

The purchase agreement provides that the obligations of the initial purchasers to purchase the notes offered hereby are subject to certain conditions precedent and that the initial purchasers will purchase all of the notes offered by this offering memorandum if any of these notes are purchased.

After the initial offering, the initial purchasers may change the offering price and other selling terms.

We have agreed to indemnify the initial purchasers against some specified types of liabilities, including liabilities under the Securities Act, and to contribute to payments the initial purchasers may be required to make in respect of any of these liabilities.

The notes have not been registered under the Securities Act. Each of the initial purchasers has agreed that it will offer or sell the notes only (i) in the United States to qualified institutional buyers in reliance on Rule 144A under the Securities Act or (ii) in offshore transactions in reliance on Regulation S under the Securities Act. The notes being offered and sold pursuant to Regulation S may not be offered, sold or delivered in the United States or to, or for the account or benefit of, any U.S. person, unless the notes are registered under the Securities Act, or an exemption from the registration requirements thereof is available. Terms used above have the meanings given to them by Regulation S and Rule 144A under the Securities Act. See “Transfer Restrictions.”

Until the expiration of 40 days after the commencement of the offering, any offer or sale of notes within the United States by a broker-dealer may violate the registration requirements of the Securities Act, unless such offer or sale is made pursuant to Rule 144A under the Securities Act or another available exemption from the registration requirements thereof.

The notes have not been, and will not be, registered with the CVM.

The notes are a new issue of securities with no established trading market. We do not intend to list the notes on any securities exchange or on any automated dealer quotation system other than the Luxembourg Stock Exchange and to trade on the Euro MTF. The initial purchasers may make a market in the notes after completion of the offering, but will not be obligated to do so and may discontinue any market-making activities at any time without notice. No assurance can be given as to the liquidity of the trading market for the notes or that an active public market for the notes will develop. If an active public trading market for the notes does not develop, the market price and liquidity of the notes may be adversely affected.

In connection with the offering, the initial purchasers may purchase and sell the notes in the open market. These transactions may include short sales, purchases to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the initial purchasers of a greater principal amount of notes than it is required to purchase in the offering. The initial purchasers may close out any short position by purchasing notes in the open market. A short position is more likely to be created if the initial purchasers are concerned that there may be downward pressure on the price of the notes in the open market prior to the completion of the offering. Stabilizing transactions consist of various bids for or purchases of the notes made by the initial purchasers in the open market prior to the completion of the offering.

174 The initial purchasers may impose a penalty bid. This occurs when a particular underwriter repays to the initial purchasers a portion of the underwriting discount received by it because the initial purchasers have repurchased notes sold by or for the account of that underwriter in stabilizing or short covering transactions.

Purchases to cover a short position and stabilizing transactions may have the effect of preventing or slowing a decline in the market price of the notes. Additionally, these purchases, along with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the notes. As a result, the price of the notes may be higher than the price that might otherwise exist in the open market. These transactions may be effected in the over-the-counter market or otherwise.

The initial purchasers and/or their affiliates may enter into derivative and/or structured transactions with clients, at their request, in connection with the notes and the initial purchasers and/or their affiliates may also purchase some of the notes to hedge their risk exposure in connection with such transactions. Also, the initial purchasers and/or their affiliates may acquire for their own propriety account the notes. Such acquisitions may have an effect on demand and the price of the offering.

It is expected that delivery of the notes will be made against payment therefor on or about December 16, 2010, which is the fifth business day following the date hereof (this settlement cycle being referred to as “T+ 5”). Under Rule 15c6-1 under the U.S. Securities and Exchange Act of 1934, as amended, trades in the secondary market generally are required to settle in three business days, unless the parties to any such trade expressly agree otherwise. Accordingly, U.S. purchasers who wish to trade notes on the date hereof or the next succeeding business day will be required, by virtue of the fact that the notes initially will settle in T+5, to specify an alternate settlement cycle at the time of any such trade to prevent a failed settlement. Purchasers of notes in other countries who wish to trade the notes on the date hereof or the next succeeding business day should consult their own advisor.

Banco Itaú Europa, S.A. – London Branch is not a broker-dealer registered with the SEC and therefore may not make sales of any notes in the United States or to U.S. persons except in compliance with applicable U.S. laws and regulations. To the extent that Banco Itaú Europa, S.A. – London Branch intends to effect sales of the notes in the United States, it will do so only through Itau BBA USA Securities, Inc., or one or more U.S. registered broker- dealers or otherwise as permitted by applicable U.S. law.

Selling Restrictions

European Economic Area

In relation to each Member State of the European Economic Area that has implemented the Prospectus Directive (each, a relevant Member State), with effect from and including the date on which the Prospectus Directive is implemented in that relevant Member State (the “relevant implementation date”) an offer of notes described in this offering memorandum may not be made to the public in that relevant Member State prior to the publication of a prospectus in relation to the notes that has been approved by the competent authority in that relevant Member State or, where appropriate, approved in another relevant Member State and notified to the competent authority in that relevant Member State, all in accordance with the Prospectus Directive, except that, with effect from and including the relevant implementation date, an offer of securities may be offered to the public in that relevant Member State at any time:

 to any legal entity that is authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

 to any legal entity that has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;

 by the initial purchasers to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the initial purchasers for any such offer; or

175  in any other circumstances that do not require the publication of a prospectus pursuant to Article 3 of the Prospectus Directive.

Each purchaser of notes described in this offering memorandum located within a relevant Member State will be deemed to have represented, acknowledged and agreed that it is a “qualified investor” within the meaning of Article 2(1)(e) of the Prospectus Directive.

For purposes of this provision, the expression an “offer to the public” in any relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe the securities, as the expression may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each relevant Member State.

We have not authorized and do not authorize the making of any offer of notes through any financial intermediary on our behalf, other than offers made by the initial purchasers with a view to the final placement of the notes as contemplated in this offering memorandum. Accordingly, no purchaser of the notes is authorized to make any further offer of the notes on our behalf or on behalf of the initial purchasers.

United Kingdom

Each initial purchaser has represented, warranted and agreed that:

(a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the notes in circumstances in which Section 21(1) of the FSMA does not apply to the Company; and

(b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the notes in, from or otherwise involving the United Kingdom.

Switzerland

This offering memorandum as well as any other material relating to the notes which are the subject of the offering contemplated by this offering memorandum does not constitute an issue prospectus pursuant to Articles 652a and/or 1156 of the Swiss Code of Obligations. The notes will not be listed on the SIX Swiss Exchange and, therefore, the documents relating to the notes, including, but not limited to, this offering memorandum, do not claim to comply with the disclosure standards of the listing rules of the SIX Swiss Exchange and corresponding prospectus schemes annexed to the listing rules of the SIX Swiss Exchange. The notes are being offered in Switzerland by way of a private placement, i.e., to a small number of selected investors only, without any public offer and only to investors who do not purchase the notes with the intention to distribute them to the public. The investors will be individually approached by the issuer from time to time. This offering memorandum as well as any other material relating to the notes is personal and confidential and does not constitute an offer to any other person. This offering memorandum may only be used by those investors to whom it has been handed out in connection with the offering described herein and may neither directly nor indirectly be distributed or made available to other persons without express consent of the issuer. It may not be used in connection with any other offer and shall in particular not be copied and/or distributed to the public in (or from) Switzerland.

Hong Kong

This offering memorandum has not been approved by or registered with the Securities and Futures Commission of Hong Kong or the Registrar of Companies of Hong Kong.

No person may offer or sell in Hong Kong, by means of any document, any notes other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules

176 made under that Ordinance; or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance.

No person may issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the notes which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to notes which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.

Singapore

This offering memorandum has not been and will not be registered as a prospectus with the Monetary Authority of Singapore and the notes are offered by the issuer pursuant to exemptions invoked under Section 274 and Section 275 of the Securities and Futures Act, Chapter 289 of Singapore (“Securities and Futures Act”). Accordingly, this offering memorandum and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the notes will not be circulated or distributed, nor will the notes be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the Securities and Futures Act or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the Securities and Futures Act.

Where the notes are subscribed or purchased under Section 275 of the Securities and Futures Act by a relevant person which is:

(a) a corporation (which is not an accredited investor (as defined in Section 4A of the Securities and Futures Act)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for six months after that corporation or that trust has acquired the notes under Section 275 of the Securities and Futures Act except:

(1) to an institutional investor under Section 274 of the Securities and Futures Act or to a relevant person, or any person pursuant to Section 275(1) or Section 275(1A) of the Securities and Futures Act, respectively, and in accordance with the conditions specified in Section 275 of the Securities and Futures Act;

(2) where no consideration is given for the transfer; or

(3) by operation of law.

177 LEGAL MATTERS

The validity of the notes will be passed upon for us by Mayer Brown LLP, U.S. counsel to the Company, and for the initial purchasers by White & Case LLP, U.S. counsel to the initial purchasers.

Certain matters of Brazilian law relating to the notes will be passed upon for us by Felsberg, Pedretti, Mannrich e Aidar Advogados e Consultores Legais, Brazilian counsel to the Company. Souza, Cescon, Barrieu & Flesch Advogados, Brazilian counsel to the initial purchasers, will pass upon certain matters of Brazilian law relating to the notes for the initial purchasers.

INDEPENDENT ACCOUNTANTS

The financial statements of Companhia de Saneamento Básico do Estado de São Paulo — SABESP as of and for the year ended December 31, 2007, included in this offering memorandum, have been audited by Deloitte Touche Tohmatsu Auditores Independentes, independent accountants, in accordance with audit standards applicable in Brazil, as stated in their report appearing herein, and include explanatory paragraphs relating to (i) the fact that the Company was negotiating with the São Paulo State government for the reimbursement of amounts the Company paid on behalf of the State in respect of supplementary pensions (Plan G0); (ii) the fact that on November 14, 2007 the Company and the city of São Paulo entered into an arrangement seeking stability in the provision of services in the city of São Paulo as well as the implementation of sanitation and environmental actions supplementary to the actions taken by the city; and (iii) the fact that the financial statements as of and for the year anded December 31, 2007 had been adjusted and were restated as required by accounting standard NPC 12 (Accounting Policies, Changes in Accounting Estimates and Errors) issued by the Brazilian Institute of Independent Auditors (Instituto Brasileiro de Auditores Independentes), in view of the changes in Brazilian accounting practices in 2008.

The consolidated financial statements of Companhia de Saneamento Básico do Estado de São Paulo — SABESP as of and for the years ended December 31, 2009 and 2008, included in this offering memorandum, have been audited by PricewaterhouseCoopers Auditores Independentes, independent accountants, as stated in their report appearing herein.

With respect to the consolidated financial statements of Companhia de Saneamento Básico do Estado de São Paulo — SABESP as of September 30, 2010 and for the nine months ended September 30, 2010 and 2009, included in this offering memorandum, PricewaterhouseCoopers Auditores Independentes reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated November 12, 2010 appearing herein states that they did not audit and they do not express an opinion on those consolidated financial statements. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied.

AVAILABLE INFORMATION

To permit compliance with Rule 144A in connection with resales of the notes, for so long as the notes are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, we are required to furnish upon request of a holder of a note and a prospective purchaser designated by such holder the information required to be delivered under Rule 144A(d)(4) if at the time of such request we are neither a reporting company under Section 13 or Section 15(d) of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder.

178 LISTING AND GENERAL INFORMATION

1. The notes have been accepted for clearance through DTC, Euroclear and Clearstream. The CUSIP, Common Code and ISIN numbers for the notes are as follows:

Rule 144A Global Note Regulation S Global Note CUSIP 20441A AH5 P3058W AC1 Common Code — 056950265 ISIN US20441AAH59 USP3058WAC12

2. Except as disclosed in this offering memorandum, there has been no material adverse change in our financial position since December 31, 2009, the date of the latest consolidated financial statements of the Company included in this offering memorandum.

3. Copies of the articles of association and the latest consolidated financial statements of the Company, as well as the indenture, may be obtained during normal business hours at the offices of the listing agent in Luxembourg and at our principal offices.

4. Except as disclosed in this offering memorandum, we are not involved in any litigation or arbitration proceedings relating to claims or amounts that are material in the context of this offering, nor so far as we are aware, is any such litigation or arbitration pending or threatened.

5. Application has been made to list the notes on the Official List of the Luxembourg Stock Exchange and to trade the notes on the Euro MTF Market.

6. The issuance of the notes was authorized by our board of directors on October 28, 2010 and by our board of executive officers on October 21, 2010.

179 [PAGE LEFT INTENTIONALLY BLANK]

180 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited Interim Consolidated Financial Statements as of September 30, 2010 and for the nine months ended September 30, 2010 and 2009

Report of Independent Auditors on the Limited Review...... F-2 Balance Sheets as of September 30, 2010 and December 31, 2009 ...... F-3 Statements of Income for the nine months ended September 30, 2010 and 2009 ...... F-4 Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2010 and 2009...... F-5 Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 ...... F-6 Statement of Value-Added for the nine months ended September 30, 2010 and 2009 ...... F-7 Notes to the Consolidated Financial Statements ...... F-8

Consolidated Financial Statements as of and for the years ended December 31, 2009 and 2008

Report of Independent Auditors ...... F-54 Balance Sheets as of December 31, 2009 and 2008 ...... F-56 Statements of Income for the years ended December 31, 2009 and 2008...... F-57 Statements of Changes in Shareholders’ Equity for the years ended December 31, 2009 and 2008 ...... F-58 Statements of Cash Flows for the years ended December 31, 2009 and 2008 ...... F-59 Statements of Value Added for the years ended December 31, 2009 and 2008...... F-60 Notes to the Consolidated Financial Statements ...... F-61

Consolidated Financial Statements as of and for the years ended December 31, 2008 and 2007

Reports of Independent Auditors...... F-110 Balance Sheets as of December 31, 2008 and 2007 ...... F-115 Statements of Income for the years ended December 31, 2008 and 2007...... F-116 Statements of Changes in Shareholders’ Equity for the years ended December 31, 2008 and 2007 ...... F-117 Statements of Cash Flows for the years ended December 31, 2008 and 2007 ...... F-118 Statements of Value Added for the years ended December 31, 2008 and 2007...... F-119 Notes to the Consolidated Financial Statements ...... F-120

F-1 Review Report of Independent Accountants on Limited Reviews

To the Board of Directors and Shareholders Companhia de Saneamento Básico do Estado de São Paulo - SABESP

1 We have carried out limited reviews of the accompanying balance sheets of Companhia de Saneamento Basico do Estado de São Paulo – SABESP (“Company”) and subsidiary as of September 30, 2010 and of the related statements of income, of changes in shareholders’ equity, of cash flows and of value added for the nine-month period ended September 30, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these financial statements.

2 Our review was conducted in accordance with specific standards established by the Institute of Independent Auditors of Brazil (IBRACON), in conjunction with the Federal Accounting Council (CFC), and mainly comprised the application of analytical review procedures to financial data and inquiries of personnel responsible for accounting and financial matters about the criteria applied in the preparation of the financial statements. Because these procedures do not comprise an audit carried out in accordance with approved Brazilian auditing standards, we do not express an opinion on these financial statements.

3 Based on our limited review, we are not aware of any material modifications that should be made to the financial statements reviewed by us in order that for them be in conformity with the accounting practices adopted in Brazil.

4 As mentioned in Note 2, the CVM has approved several Pronouncements, Interpretations and Technical Guidance issued by the Brazilian Accounting Pronouncements Committee (CPC) to be effective as from 2010, which altered the accounting practices adopted in Brazil. As permitted by CVM Resolution No. 603/09, the Company’s management has opted to present its consolidated financial statements by using the accounting standards adopted in Brazil until December 31, 2009. As required by said Resolution, Note 2 to the consolidated financial statements disclose this fact and also provides a description of the main changes that may have an impact on the Company's year-end financial statements, as well as an estimate of their possible effects on shareholders' equity and results of operations.

5 As mentioned in Note 5, the Company and the Government of the State of São Paulo entered into an agreement to settle the so-called “uncontroversial amount”, referring to the reimbursement of payments related to retirement and pension plans paid by the Company, in the name and on account of the Government of the State of Sao Paulo. The recovery of this asset may be influenced by: (a) the resolution of legal uncertainties caused by public action and legislative authorization related to the transfer of reservoirs to the Company, amounting to R$ 696,283 thousand, and (b) the financial collection of other amounts, totalling R$ 197,688 thousand.

São Paulo, November 12, 2010

PricewaterhouseCoopers Auditores Independentes CRC 2SP000160/O-5

Valdir Renato Coscodai Contador CRC 1SP165875/O-6

F-2 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP CONSOLIDATED BALANCE SHEETS as of September 30, 2010 and December 31, 2009 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

September 30, December 31, September 30, December 31, Assets Note Liabilities and Shareholders´ Equity Note 2010 2009 2010 2009 (unaudited) (unaudited) Current assets Current liabilities Cash and cash equivalents 3 1.367.191 771.008 Accounts payable to suppliers and contractors 194.578 195.765 Customer accounts receivable, net 4 1.040.653 1.179.730 Loans and financings 10 1.163.642 1.010.537 Accounts receivables from related party, net 5 151.398 135.987 Accrued payroll and related charges 276.932 239.152 Inventories 29.994 39.877 Taxes payable 182.058 218.867 Taxes recoverable 10.357 3.017 Deferred income taxes 11 18.469 37.912 Other assets 546.247 141.504 Interest on shareholders' equity payable 56 365.442 Deferred income taxes 11 276.831 258.551 Provisions for Contingencies 15 759.000 643.863 Total Current Assets 3.422.671 2.529.674 Other trade accounts payable 342.306 239.494 Other liabilities 202.960 158.864 Total Current Liabilities 3.140.001 3.109.896

Noncurrent assets Noncurrent liabilities Long Term Receivables Loans and financings 10 6.496.300 5.549.463 Cash and cash equivalents 4 351.499 266.543 Taxes payable 61.295 85.029 Accounts receivables from related party, net 5 921.983 956.648 Deferred income taxes 11 169.161 156.860 Indemnities receivable 6 146.213 146.213 Provisions for Contingencies 15 643.068 824.957 Escrow deposits 41.804 46.365 Provisions for actuarial liabilities Law 4819/58 493.531 518.027 Other assets 104.469 100.395 Pension plan obligation 13 506.660 480.103 Deferred income taxes 11 568.671 530.131 Other liabilities 427.991 313.231 2.134.639 2.046.295 Total Noncurrent liabilities 8.798.006 7.927.670

Investments 7 1.320 720 Property, plant & equipment, net 8 8.906.945 15.443.211 Capital Stock 6.203.688 6.203.688 Intangible assets, net 9 9.074.119 1.545.303 Capital reserve 124.255 124.255 17.982.384 16.989.234 Revaluation reserve 2.109.284 2.145.100 Earnings reserves 2.054.594 2.054.594 Total Non Current Assets 20.117.023 19.035.529 Retained earnings 1.109.866 - Total Shareholders´ Equity 11.601.687 10.527.637

TOTAL ASSETS 23.539.694 21.565.203 TOTAL LIABILITIES AND SHAREHOLDERS´ EQUITY 23.539.694 21.565.203

The accompanying notes are an integral part of these financial statements

F-3 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP CONSOLIDATED STATEMENT OF INCOME for the nine months ended on September 30, 2010 and 2009 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

Note 2010 2009 (unaudited) (unaudited)

Gross revenue from sales and services 18 5.766.598 5.272.095

Gross revenue deductions (409.172) (366.135)

Net revenue from sales and services 5.357.426 4.905.960

Cost of sales and services 19 (2.327.203) (2.427.366)

Gross profit 3.030.223 2.478.594

Operating income Selling expenses 19 (630.725) (597.238) Administrative expenses 19 (399.791) (458.850) Other operating income (expenses) 20 5.171 14.834

INCOME BEFORE FINANCIAL RESULT 2.004.878 1.437.340

Financial expenses, Net 19 (376.695) (456.303) Foreign exchange result, net 19 22.078 367.087

INCOME BEFORE INCOME TAX AND SOCIAL CONTRIBUTION 1.650.261 1.348.124

Current 11(c) (634.842) (576.057) Deferred 11(c) 58.631 144.539

NET INCOME 1.074.050 916.606

Earnings per Share in R$ 16(b) 4,71 4,02

The accompanying notes are an integral part of these financial statements

F-4 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP CONSOLIDATED STATEMENT OF CHANGES TO THE SHAREHOLDERS´ EQUITY For the nine-month period ended on September 30, 2010 and 2009 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

Earnings reserves Capital Capital Revaluation Retained Note stock reserve reserve legal investment earnings TOTAL

Balance as of December 31, 2008 6,203,688 124,255 2,253,012 309,832 657,128 - 9,547,915

Realization of revaluation reserve 8(h) - - (67,366) - - 67,366 - Interest on shareholders’ equity - - - - - (138,980) (138,980) Net income - - - - - 916,606 1,074,050 Balance as of September 30, 2009 6,203,688 124,255 2,185,646 309,832 657,128 844,992 10,325,541

Earnings reserves Capital Capital Revaluation Retained Note stock reserve reserve legal investment earnings TOTAL

Balance as of December 31, 2009 6,203,688 124,255 2,145,100 378,526 1,676,068 - 10,527,637

Realization of revaluation reserve 8(h) - - (35,816) - - 35,816 - Net income - - - - - 1,074,050 1,074,050 Balance as of September 30, 2010 6,203,688 124,255 2,109,284 378,526 1,676,068 1,109,866 11,601,687

The accompanying notes are an integral part of these financial statements

F-5 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP CONSOLIDATED STATEMENT OF CASH FLOWS For the nine-month period ended on September 30, 2010 and 2009 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

September 30, September 30, Note 2010 2009 (unaudited) (unaudited)

Income before income tax and social contribution 1.650.261 1.348.124 Adjustments for: Provisions for contingencies 228.460 425.534 Provision for actuarial liabilities Law Nr. 4819/58 14.237 - Reversal of provision for losses (29) 846 Other provisions (900) 316 Pension plan obligations 38.531 57.365 Write-off of fixed assets 08(b) 14.941 11.750 Other write-offs - 4.542 Depreciation and amortization 20 439.259 484.656 Interests on loans and financing 390.456 348.658 Monetary and Currency variations from loans and financings 42.173 (376.288) Interests and monetary variation expenses 12 3.211 4.345 Interests and monetary variation income (44.842) (16.046) Allowance for doubtfull accounts 20 257.911 234.658 Provision for TAC retirees 18.379 102.800 Provision for PMSP agreement 27.460 65.527 Provision for investment on PMSP agreement 79.330 - Provision for defined contribution plan 25.321 - Adjusted Net Income 3.184.159 2.696.787 Changes in assets Customers accounts receivable (177.143) (132.227) Accounts receivable from related party 26.499 51.069 Indemnities receivable - 2.581 Inventories 9.912 9.728 Taxes recoverable (7.340) 1.141 Other assets (407.275) (21.766) Escrow deposits (3.319) (29.130)

Changes in Liabilities Accounts payable to suppliers and contractors (268) 26.343 Accrued payroll and related charges 19.401 51.060 Provision for actuarial liability Law 4819/58 (38.733) - Taxes payable (55.371) (68.674) Other trade accounts payable 1.750 1.519 Other liabilities 95.021 128.570 Provisions for contingencies (277.925) (195.437) Pension plan obligation (11.974) (12.711) Change in Assets and Liabilities (826.765) (187.934)

Cash generated from operating activities 2.357.394 2.508.853

Interests paid (473.608) (407.019) Income tax and social contributions paid (648.556) (477.641)

Net cash generated from operating activities 1.235.230 1.624.193

Purchase of property, plant and equipment (1.282.889) (1.336.957) Purchase of intangibles assets (36.302) (23.446) Increase in investments (600) 2.270

Net cash used in investing activities (1.319.791) (1.358.133)

Loans and financings Proceeds from borrowings 2.702.413 939.473 Repayment of borrowings (1.656.283) (1.159.665) Payment of interests on shareholders´ equity (365.386) (285.331)

Net cash provided by financing activities 680.744 (505.523)

Increase in cash and cash equivalents 596.183 (239.463)

Cash and Cash Equivalents in the beginning of the period 3 771.008 625.732 Cash and Cash Equivalents at the end of the period 3 1.367.191 386.269

Increase in cash and cash Equivalents 596.183 (239.463)

Cash Flow supplemental information: Capitalization of interests and financial charges 08(c) 94.791 (136.149) Cofins and Pasep paid 418.242 374.861 Agreements and commitments of program contracts 33.687 17.577

The accompanying notes are an integral part of these financial statements

F-6 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP CONSOLIDATED STATEMENT OF VALUE-ADDED For the nine-month period ended on September 30, 2010 and 2009 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

September September Note 30, 2010 30, 2009 Revenues (unaudited) (unaudited)

Revenues from Sales and Services 18 5,766,598 5,272,095 Other income 20 41,794 36,992 Income related to the construction of own assets 204,479 (22,584) Allowance for doubtful accounts 19 (257,911) (234,658) 5,754,960 5,051,845 Inputs purchased from third parties Cost of sales and services (1,099,572) (1,019,575) Materials, electricity, outsourced services and others (476,434) (496,240) Other operating expenses 20 (32,757) (18,736) (1,608,763) (1,534,551) Gross Value Added 4,146,197 3,517,294 Retentions Depreciation and Amortization (including capitalized) (440,389) (486,031) Wealth created by the Company 3,705,808 3,031,263 Wealth received in transfer Equity result 19 240,184 153,823 240,184 153,823 Wealth for distribution 3,945,992 3,185,086 Distribution of wealth Employees Salaries and wages 641,959 16.3% 693,349 21.8% Benefits 209,648 5.3% 231,118 7.2% Severance indemnity fund for employee (FGTS) 67,983 1.7% 177,434 5.6% 919,590 23.3% 1,101,901 34.6% Taxes, fees and contributions Federal 1,188,723 30.2% 998,545 31.3% State 28,063 0.7% 28,004 0.9% Municipal 23,909 0.6% 16,514 0.5% 1,240,695 31.5% 1,043,063 32.7% Lenders and lessors Interests, foreign exchange and monetary variation 687,297 17.4% 104,251 3.3% Rentals 24,360 0.6% 19,265 0.6% 711,657 18.0% 123,516 3.9% Shareholders Interests on shareholders’ equity - 0.0% 138,980 4.4% Retained earnings 1,074,050 27.2% 777,626 24.4% 1,074,050 27.2% 916,606 28.8% Wealth distributed 3,945,992 100% 3,185,086 100%

The accompanying notes are an integral part of these financial statements

F-7 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

1. OPERATIONS

Companhia de Saneamento Básico do Estado de São Paulo - Sabesp (“Sabesp” or the “Company”) is a mixed-capital company headquartered in São Paulo, controlled by the São Paulo State Government. The Company is engaged in the provision of basic and environmental sanitation services, and supplies treated water on a bulk basis and provides sewage treatment services for another six municipalities of the Greater São Paulo Metropolitan Area.

In addition to providing basic sanitation services in the State of São Paulo, SABESP may perform these activities in other states and countries, and can operate in drainage, urban cleaning, solid waste handling and energy markets. The new Sabesp vision sets forth as objective to be recognized as the company that has universalized the Sanitation services in its area of operation, focused on the customer, in a sustainable and competitive way, with excellence in environmental solutions.

The Company provides water and sewage services in 364 municipalities in the State of São Paulo, having temporarily discontinued operations in Itapira, Tarumã, Araçoiaba da Serra, Iperó and Cajobi due to judicial orders under ongoing lawsuitsOn September 30, 2010, the assets referring to these five municipalities were R$20,158. In most of these municipalities operations are based on 30-year concession agreements. Up to September 30, 2010, 92 concessions had expired and are being negotiated. From October 1st, 2010 to 2030 72 concessions will expire, including those with indefinite term. By September 30, 2010, 198 program contracts were signed.

Management believes that all concessions terminated and not yet renewed will result in new contracts or contract extensions, and does not consider the risk of discontinuity in the provision of municipal water and sewage services. On September 30, 2010 the carrying amount of intangible assets used in the 92 municipalities under negotiation totaled R$2,192 million and the related revenue for the period then ended totaled R$886 million.

In the municipality of Santos, in the Baixada Santista, which has a significant population, the Company operates under an authorization by public deed, a situation similar to other municipalities in that region and in the Ribeira valley, where the Company started to operate after the merger of the companies that formed it.

The significant regulation changes of the sanitation sector occurred in 2007 generated new challenges and opportunities to Sabesp. The regulatory milestone has consolidated the integration between the investments of the service provider and the priorities set forth by the users, it made the provision of accounts more effective and transparent and increased the security for investments.

The Company’s shares have been listed in the “Novo Mercado” (New Market) segment of the BOVESPA (São Paulo Stock Exchange) since April 2002, and on the New York Stock Exchange (NYSE) as ADRs since May 2002.

F-8 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

All information about areas of concession, number of municipalities, water and sewage volume and other related data disclosed in this consolidated financial information, which do not arise from the accounting and/or financial statements, have not been reviewed by the independent auditors.

2. PRESENTATION OF THE FINANCIAL STATEMENTS

The financial statements have been approved by the Board of Directors on November 11, 2010.

(i) Presentation of the Information

The information were prepared and have been presented consistently with the accounting standards adopted in the preparation of the financial statements of the fiscal year ended on December 31, 2009, as allowed by CVM Resolution 603/09. On September 30, 2010, Management prepared an estimate of the possible effects in shareholders’ equity and in the result, being that the main accounting statements, interpretations and directions that might impact the Company’s financial statements are:

CPC 20 – Cost of Loans, approved by CVM Resolution 577

CPC 21 – Interim financial statement, approved by CVM Resolution 581

CPC 22 - Segment Information, approved by CVM Resolution 582

CPC 27 – Fixed Assets, approved by CVM Resolution 619

CPC 33 – Employees’ Benefits, approved by CVM Resolution 600

CPC 37 – Initial adoption of accounting international standards, approved by CVM Resolution 609

CPC 38 – Financial Instruments: recognition and measurement, approved by CVM Resolution 604

CPC 39 – Financial Instruments: presentation, approved by CVM Resolution 604

CPC 40 – Financial Instruments: evidence, approved by CVM Resolution 604

- Interpretations:

ICPC 01 – Concession Contracts, approved by CVM Resolution 611

ICPC 08 – Accounting for proposal for payment of dividends, approved by CVM Resolution 601

F-9 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

ICPC 11 – Receiving of customers’ assets in transfer, approved by CVM Resolution 620

Estimate of possible impacts in the application of the CPC’s:

September 30, 2010 Shareholders’ Result Equity Balances before the application of CPC's 11,601,687 1,074,050 Write-off of GESP receivables related to Law (696,283) - 4819/58 Supplement of Actuarial Obligation (892,883) (59,260) Other Adjustments 203,736 76,500 Deferred Income Taxes (683,386) (7,359)

Balance after the application of CPC’s 9,532,871 1,083,931

After concluding the assessment related to the disclosure of the new CPC’s, management will restate its interim consolidated financial statements as set forth by the Deliberation 603/09 issued by the CVM. Currently, management has considered impractical presenting the Company´s interim consolidated financial statements as of September 30, 2010, in accordance with the new CPC’s.

(ii) Consolidated Financial Statements

The consolidated financial statements include the financial statements of Sabesp and its subsidiaries Sesamm, Aquapolo and Saneaqua Mairinque which were consolidated by the proportion of their equity interest. The Company has joint control over its subsidiaries, see details in Note 7. The accounting policies and fiscal year applied by its subsidiaries are consistent with the accounting policies and fiscal year adopted by the Company.

Although Sabesp’s does not have the majority interest in Sesamm, the shareholders’ agreement provides for the vetoing power on certain management matters together with OHL Meio Ambiente, Inima S.A.U. – Unipersonal (“Inima”) indicating joint control over Sesamm. Accordingly, the financial statements have been presented under the proportional consolidation method.

On August 15, 2008 the special purpose company Sesamm - Serviços de Saneamento de Mogi Mirim S/A established, which has period of duration of 30 years from the date Concession Contract with the municipality was signed. Sesamm has the purpose to implement sewage treatment system and to provide sewage collection service to the Municipality of Mogi Mirim, including the disposal of the solid waste.

F-10 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

On September 30, 2010 the Sesamm’s capital stock totaled R$10,669, divided into 10,669,549 common nominated shares, with no par value, of which Sabesp holds 36% of equity interest.

On September 30, 2010 the Sesamm’s operations had not been started yet.

On October 8th, 2009, Sabesp and Foz do Brasil S/A established the company Aquapolo Ambiental S/A, which has the purpose to product, supply and commercialize water for reutilization to Quattor Química S.A., Quattor Petroquimica S.A. and Quattor Participações and other companies that comprise the Petrochemical Polo. Sabesp owns 49% of the capital stock that represented R$490 on September 30, 2010.

On July 14th, 2010, Sabesp and Foz do Brasil S/A established the company Saneaqua Mairinque S/A which has the concession of providing water and sewage services to the Municipality of Mairinque. Sabesp owns 30% of the capital stock that represented R$600 on September 30, 2010

The consolidation process of the balance sheet and income statement accounts combines the balances of the assets, liabilities, revenues and expenses according to their nature and eliminate the equity interest of the holding company in the capital stock and retained earnings of the subsidiary.

3. CASH AND CASH EQUIVALENTS

September 30, December 2010 31, 2009 Cash and Banks 68,489 98,368 Cash Equivalents 1,298,702 672,640 1,367,191 771,008

4. CUSTOMERS ACCOUNTS RECEIVABLE, NET

(a) Balances

September 30, December 31, 2010 2009 Private sector General and special customers (i) (ii) 810,075 776,040 Agreements (iii) 255,634 261,139 1,065,709 1,037,179 Government entities Municipal 559,049 569,655 Federal 2,850 2,871 Agreements (iii) 202,087 143,575

F-11 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

September 30, December 31, 2010 2009 763,986 716,101 Wholesale customers – municipal governments: (iv) - Guarulhos 447,934 411,774 - Mauá 210,374 190,153 - Mogi das Cruzes 14,313 14,188 - Santo André 473,328 428,227 - São Caetano do Sul 3,681 3,410 - Diadema 144,704 134,992 Total wholesale - Municipal City Halls 1,294,334 1,182,744

Unbilled supply 365,425 364,480 Subtotal 3,489,454 3,300,504 Allowance for doubtful accounts (2,097,302) (1,854,231) Total 1,392,152 1,446,273

Current 1,040,653 1,179,730 Non-current (v) 351,499 266,543

(i) General customers - residential and small and medium-sized companies.

(ii) Special customers - large consumers, commercial, industries, condominiums and special billing consumers (industrial waste, wells, etc.).

(iii) Agreements - installment payments of past-due receivables, plus monetary restatement and interest.

(iv) Whosale customers - municipal governments – This balance refers to the sale of treated water to municipalities, which are responsible for the distribution to, billing and charging final consumers. Some of these municipalities are questioning in court the tariffs charged by Sabesp and do not pay for the amounts in dispute. The amounts past due, which are substantially included in the allowance for doubtful accounts, are classified in non-current assets, pursuant to the changes below:

Nine-month period ended September 30, December 31, 2010 2009 Balance at beginning of period 1,259,375 1,074,368 Billing for services provided 88,530 332,975 Receipts – services in the current year (53,571) (164,266) Receipts – services in the previous year - (60,333) Balance at end of period 1,294,334 1,182,744

F-12 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

Nine-month period ended September 30, December 31, 2010 2009

Current 29,476 68,898 Noncurrent 1,264,858 1,113,846

(v) The noncurrent portion consists of trade accounts receivable that are past due and renegotiated with customers and amounts past due related to wholesale to municipal authorities and are recognized net of allowance for doubtful accounts.

(b) The aging of trade accounts receivable is as follows:

September 30, 2010 December 31, 2009 Current 1,064,940 1,002,506 Past-due: Up to 30 days 138,693 160,979 From 31 to 60 days 70,369 68,247 From 61 to 90 days 42,278 47,349 From 91 to 120 days 37,257 51,887 From 121 to 180 days 71,187 56,845 From 181 to 360 days 129,793 112,472 Over 360 days 1,934,937 1,800,219 Total 3,489,454 3,300,504

(i) The change of the allowance is presented as follows:

Nine-month period ended September 30, 2010 December 31, 2009 Balance at beginning of period 1,854,231 1,633,289

Private sector / government entities 119,502 30,105 Wholesale customers 123,569 190,837

Additions for the period 243,071 220,942 Balance at end of period 2,097,302 1,854,231

Current 991,581 852,420 Noncurrent 1,105,721 1,001,811

F-13 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

(ii) Change in net income

The Company recognized losses on accounts receivable in the third quarter of 2010 totalling R$88,631 under “Selling Expenses”. In the third quarter of 2009, these losses amounted to R$71,509. Nime-month period ended September 30, September 30, 2010 2009 Provisions (over 5,000 Brazilian reais) (326,830) (297,743) Recoveries (over 5,000 Brazilian reais) 83,758 109,733 Write-offs (lower or equal to 5,000 Brazilian reais) (120,011) (123,844) Recoveries (lower or equal to 5,000 Brazilian reais) 105,172 77,196 Expenses (257,911) (234,658)

5. BALANCES AND TRANSACTIONS WITH RELATED PARTIES

The Company is a party to transactions with its controlling shareholder, the São Paulo State Government (“Gesp”), and companies related to it.

(a) Accounts receivable, interest on shareholders' equity and operating revenue with the São Paulo State Government

September December 31, 30,2010 2009 Accounts receivables Current: Water and sewage services (i) 111,069 82,278 Gesp Agreement (iii), (iv) and (v) 22,861 26,181 Allowance for Losses (v) (12,389) (12,389) Reimbursement for supplementary pension benefits - Agreement (ii) and (vi) 25,494 25,494 Reimbursement for supplementary pension benefits paid - Monthly flow (ii) and (vi) 4,363 14,423 Current assets 151,398 135,987 Noncurrent assets: Water and sewage services - Gesp Agreement (iii), (iv) and (v) 57,869 73,414 Reimbursement for supplementary pension benefits paid - Controversial (ii) and (vi) 510,324 471,591 Allowance for Losses - Controversial (vii) (510,324) (471,591) Reimbursement for supplementary pension benefits - Agreement (ii) and (vi) 167,831 186,951 Reimbursement for supplementary pension benefits - Reservoir (ii) and (vi) 696,283 696,283 Total noncurrent 921,983 956,648 Total receivables from shareholder 1,073,381 1,092,635

F-14 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

September December 31, 30,2010 2009

Provision of water and sewage services 179,410 169,484 Reimbursement for supplementary pension benefits 893,971 923,151 1,073,381 1,092,635

Interest on capital payable - 198,099

Nine –month period ended September 30, September 30, Gross revenue from sales and services 2010 2009 Water supply 159,158 142,370 Sewage services 137,559 120,823 Payments received from related parties (274,361) (198,211)

Financial income 89,748 87,523

(i) Water and sewage services

The Company provides water supply and sewage collection services to the São Paulo State Government and other companies related to it, under usual market terms and conditions in accordance with management , except for the settlement of receivables outstanding under the terms mentioned in items (iii), (iv) and (v).

(ii) Reimbursement for supplementary pension benefits paid

It refers to amounts of supplementary retirement and pension benefits provided for in Sao Paulo State Law 4819/58 (“Benefits”) paid by the Company to former employees or pensioners.

(iii) Second Amendment to the Gesp Agreement

On December 28, 2007, the Company and the Sao Paulo State Government, represented by the Department of Finance, signed the second amendment to the terms of the original Gesp agreement, (1) agreeing upon the payment in installments of the remaining balance of the First Amendment, in the amount of R$133,709 at November 30, 2007, to be paid in 60 equal, monthly and consecutive installments, beginning on January 02, 2008. The amount of the installments is monetarily restated according to the fluctuation of the IPCA-IBGE, plus interest of 0.5% per month. In the total amount of this agreement, which installments have been paid monthly, it is included an amount of R$46,244 that the State Government does not recognize as due. Sabesp has a different understanding regarding this amount, by not admitting the review of the previous amount agreed upon, without the presentation, in a grounded and unmistaken

F-15 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated ) way, of the inconsistency between the amounts presented by Sabesp and the services effectively provided. (2) with regards to the past due and unpaid amounts in the period from March, 2004 to October, 2007, generated by provision of water and sewage collection services totalling R$256,608, of which R$236,126 has been received, R$8,093 was transferred to other debtor and R$12,389, object of discrepancies about the validation were submitted to ARSESP and are under analysis. Currently, divergences as to the debtor have been identified, although not regarding the amount of the debt. In case of reclassification of the person responsible for paying the bill, Sabesp transferred the collection to the corresponding entity. (3) the interests on shareholders’ equity due by Sabesp to the State Government, referring to the period from March, 2004 to December, 2006, totalling R$400,823, restated from June, 2007 to November, 2007 by the Selic rate, were paid in the period from January to March, 2008, (4) the State Government and Sabesp agreed upon compliance with their reciprocal obligations, timely, under the new terms: (a) implementation of the electronic management of accounts system to facilitate and enhance monitoring the process of payment and budget.; (b) structuring of the program “Uso Racional de Agua” - PURA, to rationalize the consumption of water and the amount of the water and sewage bills under the responsibility of the State Government; (c) the establishment of policies, by the State Government, to prevent changes in the amounts allocated to water and sewage accounts as from 2008; (d) allow the registration of state entities and other government bodies in a default system or master file; (e) ability of interrupting the supply of water to the state government entities in case of default in the payment of water and sewage bills.

Except for the out of the invoicing amount billed from November, 2007 to September, 2010, approximately 96% of the accounts have already been paid by the State Government.

(iv) Third Amendment to Gesp Agreement

On November 17, 2008, Gesp, Sabesp and DAEE, signed the Third Amendment to the Term of Agreement of Payment Commitment, and Other Agreements, where the State Government recognized a debt to Sabesp totaling R$915,251, monetarily restated up to September, 2008 in accordance with the fluctuation of the IPCA-IBGE, corresponding to the Undisputed Reimbursement (Uncontroversial Amount) of the Benefits, determined by FIPECAFI. Sabesp accepts on a provisional basis the Reservoirs as part of the payment of the Uncontroversial Amount of the Benefits and offers to the State Government a provisional settlement, recognizing a credit totaling R$696,283, corresponding to the value of the Reservoirs. The final settlement will only be effective with the actual transfer of property with the proper Registry of Deeds Office. The remaining balance totaling R$218,967 is being paid in 114 monthly, consecutive installments, totaling R$1,920 each, including the annual IPCA/FIPE fluctuation, plus interests of 0.5% p.m., beginning on November 25, 2008.

(v) As mentioned before, on November 17, 2008 the Company and the State Government signed the third amendment to the GESP Agreement, when the reimbursements called controversial and uncontroversial of the Benefits have been quantified. The amendment established the efforts to calculate the so-called as

F-16 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

Controversial Amount of the Benefits. According to the fourth clause of the agreement, the Controversial Amount of the Benefits represents by the difference between the Uncontroversial Amount of the Benefits and the amount actually paid by the Company as supplemental pension benefits set out in Law 4819/58, for which, the Company understands, the State of Sao Paulo is originally liable, although paid by Sabesp by May, 2008, under a court order. By entering into the third amendment, an appreciation of the divergences that gave rise to the controversial amount of the benefits set out in Law 4819/58 has been provided. At the time, the expectation was based on the willingness of the PGE to reanalyze the issue and the implied right of the Company to the reimbursement based on opinions from outside legal advisors. However, new opinions issued by the PGE and received on September 4th and 22nd, 2009 and on January 4th, 2010, refute the reimbursement of the largest portion of the controversial amount. Consequently, the management’s understanding has been changed about receiving the Controversial Amount of the Benefits upon a direct negotiation with the State.

Even though the negotiations with the State Government are still in progress, it is no longer possible to assure that the Company will recover the receivables related to the Controversial Amount of the Benefits without dispute. Sabesp shall not waive the receivables from the State Government to which the Company considers itself to be legally entitled. Accordingly, it will take all possible actions to resolve the issue in all technical and court levels. Should this dispute persist, the Company will take all the necessary actions to protect the Company’s interests.

In this context, the Company’s management decided to recognize in the 2008 results an allowance for losses on the outstanding balance of the controversial amount of the benefits. In September 30, 2010, the allowance was R$510,324. As a consequence of the recognition of this allowance, it was also recognized pension benefit obligations maintained with the beneficiaries and pensioners, whose right has been denied by the State Government and to be paid by Sabesp. On September 30, 2010, the amount of the pension benefits obligation totaled R$493,531 (December 31, 2009 – R$518,027). For detailed information of the pension benefits obligation refer to Note 13.

(b) Cash and cash equivalents

The Company’s cash and cash equivalents with financial institutions controlled by the State Government amounted to R$1,325,368 and R$722,170 on September 30, 2010 and December 31, 2009, respectively. The financial income arising from these investments totaled R$43,527 and R$15,058, in the third quarter of 2010 and 2009, respectively. The Company, pursuant to the State Decree nº 55357 issued on January 18, 2010, must invest its surplus resources with financial institutions controlled by the State Government.

In its operations, the Company uses the Guarapiranga and Billings reservoirs; should these reservoirs not be available for use to the Company, there could be the need to

F-17 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated ) collect water in more distant places. The Company does not pay any fee for the use of these reservoirs but it is responsible for their maintenance and operating costs.

(d) Agreements with reduced tariffs with State and Municipal Government Entities that joined the Rational Water Use Program (PURA).

The Company has signed agreements with government entities related to the State Government and to the municipalities where it operates involving approximately 6.200 properties, that benefit from a reduction of 25% in the tariff of water supply and sewage collection services when they are not in default. These agreements provide for the implementation of the rational use of water program, which takes in to consideration the reduction in the consumption of water.

(e) Guarantees

The State Government provides guarantees for some loans and financings of the Company and does not charge any fee with respect to such guarantees.

(f) Sesamm

On August 15, 2008, the Company, as part of its growth, with the companies OHL Médio Ambiente, Inima S.A.U. - Unipersonal (“Inima”), Técnicas y Gestion Medioambiental S.A.U. (“TGM”) and Estudos Tecnicos e Projetos ETEP Ltda. (“ETEP”) established the special purpose company called Sesamm - Serviços de Saneamento de Mogi Mirim S/A (“Sesamm” or “Subsidiary”) to implement sewage treatment system and to provide sewage collection service to the Municipality of Mogi Mirim, including the disposal of solid waste, as per note 7.

(g) Contract of personnel assignment among entities related to GESP

The Company has personnel assignment agreements with entities related to the São Paulo’s State Government, under which the expenditures are fully passed on and monetarily reimbursed.

On September 30, 2010, the expenditures related to personnel assigned to other entities by Sabesp amounted to R$1,396 (September 30, 2009 – R$1,364).

In the same period, the expenditures related to personnel assigned by other entitiesto Sabesp totaled R$72 (September 30, 2009 - R$73).

(h) Services obtained from entities related to GESP

On September 30, 2010 Sabesp had an outstanding balance payable of R$11,131 for services provided by entities related to São Paulo’s State Government, including the supply of electric power by Companhia Energetica de Sao Paulo - CESP, which represents 88% of this balance.

F-18 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

(i) Non-operating Assets

On September 30, 2010 and December 31, 2009, the Company had the amount of R$25,371 and R$26,479, respectively, mainly related to lend land, free of charge, to associations, support entities, non-governmental organizations and to the DAEE – Department of Water and Electric Energy, among others. The land lend to the DAEE totaled R$2,289.

(j) Sabesprev

The Company sponsors a private defined contribution pension plan, which is operated and administered by Fundação Sabesp de Seguridade Social - Sabesprev. The net actuarial liability recognized as of September 30, 2010, totaled R$506,660 (December 31, 2009 - R$480,103).

Management is making efforts towards maintaining, permanently, the timely payment by the State regarding the transactions between the parties.

6. INDEMNITIES RECEIVABLE

Indemnities receivable are a non-current asset that represents amounts receivable from the Municipalities of Diadema and Mauá as an indemnity for their unilateral termination of the concessions for water supply and sewage collection services of the Company in 1995. As of September 30, 2010 and December 31, 2009, this asset amounted to R$146.213 (nominal amounts).

Due to these concession agreements, the Company invested in the construction of water and sewage systems in those municipalities in order to meet its concession service commitments. For the unilateral termination of the Diadema and Mauá concessions, the municipalities assumed the responsibility of supplying water and sewage services in those regions. At that time, the Company reclassified the balances of property, plant and equipment related to the assets used in those municipalities to non-current assets (indemnities receivable).

The carrying value of the items of property, plant and equipment related to the Municipality of Diadema, reclassified in December, 1996, was R$75,231, and the indemnity balance from the Municipality amounted to R$60,295.

The carrying value of the items of property, plant and equipment related to the Municipality of Maua, reclassified in December, 1999, totaled R$103,763, and the indemnity balance from the Municipality amounted to R$85,918.

The Company’s rights to recover these amounts have been challenged by the municipalities.

F-19 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

Sabesp filed lawsuits to collect the amounts due by the municipalities. With regards to Diadema, after the agreement signed with Diadema’s Mayor Office and the Companhia de Saneamento de Diadema – Saned regarding the payment of indemnities has started, the lower court judge void the agreement. In December 2005, SABESP's appeal to have the agreement entered into with the municipality of Diadema declared valid was partially accepted..On December 2007, the decision that accepted the execution of the Saned was rendered, ordering this company to be summoned to pay the full amount of the debt within 15 days under the penalty of fine. The judge approved the seizure of cash from Saned's bank accounts and short-term investments (online seizure) of up to 10% of the adjusted debt. An appeal was filed against this decision, but the Appellate Court upheld the final and unappealable decision. R$ 2,919 were seized and withdrawn on March 3, 2009. Subsequently, the Court of Justice issued an injunction determining the seizure through weekly deposits by Saned in the amount corresponding to 20% of everything received in its bank accounts and short-term investments. This injunction was confirmed in sentence of the Court of Justice,which can still be appealed.

On December 29, 2008, Saned and the municipality of Diadema entered into, with the State of Sao Paulo and Sabesp, a Memorandum of Intent with the purpose to prepare studies and conduct negotiations to instruct decisions of Diadema and Sabesp, aiming to establish Sabesp as the exclusive provider of water supply and sewage service for the city of Diadema.

The parties agreed that the settlement of the existing conflicts between the companies is indispensable for the proper development of the public utility services of water supplyand sewage services in the municipality of Diadema.

On January, 2009 the parties filed a joint petition requesting the suspension of new seizures for a three-month period, trying to enable an agreement. The suspension was confirmed by the Tax Court and, successively renewed. The most recent renewal occurred on April, 2010 due to the negotiations.

With regards to Mauá, a lower court decision demanded this Municipality pay the amount of R$153.2 million as compensation for the damages loss of profits. The Maua’s City Hall filed an appeal against this decision. In July 2006, the decision was converted into a measure consisting of an expert clarification on the amount of the indemnity for loss of profits and the expert confirmed the amount of the loss of profits determined by the lower court. In August, 2008, the Court of Justice decided for the integral maintenance of the lower court decision. The Municipality of Maua filed special and extraordinary appeals against the decision that confirmed the sentence to indemnify Sabesp. Both appeals were denied by the Court of Justice, which led to the filing of a bill of review with the Superior Court of Justice and to the Federal Supreme Court. Superior Court of Justice has already denied the appeal and confirmed that no special appeal will be accepted.

Based on the opinion of the legal counsels, management continues to believe that the Company is entitled to receive the amounts related to the indemnit and continues to monitor the status of the lawsuits.

F-20 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

7. INVESTMENTS

December 31, Equity Addition September 30, 2009 Result 2010 Saneaqua Mairinque - - 600 600 Others 720 - - 720 Total 720 - 600 1,320

8. PROPERTY, PLANT & EQUIPMENT

December 31, September 30, 2010 2009 Accumulated Cost depreciation Net Net In use Water systems Land 366,786 - 366,786 952,163 Buildings 1,291,534 (781,413) 510,121 965,950 Connections 483,153 (163,259) 319,894 572,956 Water meters 143,164 (57,610) 85,554 148,287 Networks 1,926,420 (631,030) 1,295,390 2,300,440 Wells 179,837 (114,834) 65,003 78,155 Equipment 295,019 (202,061) 92,958 171,911 Others 14,410 (11,351) 3,059 3,696 4,700,323 (1,961,558) 2,738,765 5,193,558 Sewage systems Land 138,325 - 138,325 346,382 Buildings 744,232 (264,939) 479,293 904,359 Connections 489,002 (198,923) 290,079 504,125 Networks 2,341,233 (539,456) 1,801,777 4,304,948 Equipment 215,782 (158,019) 57,763 162,318 Others 2,533 (2,100) 433 665 3,931,107 (1,163,437) 2,767,670 6,222,797 General use Land 91,134 - 91,134 91,452 Buildings 136,010 (87,283) 48,727 43,077 Transportation equipment 138,215 (116,885) 21,330 20,186 Information Technology Equipment 126,598 (93,452) 33,146 43,900 Furniture, Fixture and Equipment 263,621 (144,689) 118,932 115,681 Lands granted in free lease 20,488 - 20,488 20,488

F-21 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

December 31, September 30, 2010 2009 Accumulated Cost depreciation Net Net Items granted in free lease 6,816 (1,933) 4,883 5,923 782,882 (444,242) 338,640 340,707 Subtotal in operation 9,414,312 (3,569,237) 5,845,075 11,757,062

Work in progress: Water systems 924,031 - 924,031 1,507,673 Sewage systems 2,124,587 - 2,124,587 2,166,158 Others 13,252 - 13,252 10,318 Subtotal in progress 3,061,870 - 3,061,840 3,686,149

Grand Total 12,476,182 (3,569,237) 8,906,945 15,443,211

On September 30, 2010 reclassifications totaling R$ 7,348,740, from property, plant and equipment to intangible assets, were recorded under the “Contract of Provision of Public Services of Water and Sanitation Sewage” between the State Government and the Municipality of Sao Paulo and Sabesp, for a period of 30 years, authorized by the municipal law 14.934/09.

The reclassifications are comprised by the following as of September 30, 2010:

Fixed assets 5,965,091 Construction in progress 1,383,649

The operating fixed assets represent the assets used in the provision of water supply and sewage collection services. With respect to assets under agreements based on financial and economic appraisals, Sabesp holds the possession and management.

The concession contracts state that the property will revert to the grantor at the end of the period, through compensation for the residual value or market value of the underlying physical assets in accordance with the terms in each contract. For the program contracts, indeminities relate to the present value of the cash flow in the remaining period from the date the services were restarted, restated monetarily plus interest up to the date of the effective payment.

F-22 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

(a) Depreciation

Depreciation is calculated at the following rates:

Structure - 2%, connections - 2%, hydrometers - 10%, networks - 2%, wells - 5%, equipment - 5%, transportation equipment - 10%, information technology equipment - 20%, furniture and fixture - 6.7%.

(b) Write-off of Property, Plant and Equipment

In the nine-month period ended September, 2010, the Company wrote off items of property, plant and equipment in the amount of R$14,941, including R$13,266 referring to obsolete operating assets, theft and sale, and R$1,675 referring to discontinued projects, unproductive wells and projects economically unfeasible. In the same period of 2009, the write-offs totaled R$14,021, resulting in a total loss amounted to 11,750, recognized in the caption “Other operating income (expenses)”.

The Company capitalized interests and monetary variation, including foreign exchange variation, into fixed assets in the amount of R$94,791 in the nine-month period ended September 30, 2010 (in the ninne-month period ended September 30, 2009 – R$(136,149) during the period these assets were presented as work in progress.

(d) Work in Progress

The provision for disbursements from the fourth quarter of 2010 until 2015, referring to investments already contracted, is approximately R$2,483 million (unaudited).

(e) Expropriations

As a result of the execution of priority projects related to water and sewage systems third party’s properties may need to be expropriated whose owners shall be reimbursed by amicable or judicial means.

The disbursements expected to be made starting from the fourth quarter, of 2010, is approximately R$579 million (unaudited), which shall be paid by the Company´s own resources. The assets under these lawsuits shall be recorded as fixed assets while the operation is carried out. In the nine-month period ended September 30, 2010, the amount related to the expropriations totaled R$5,509 (September 30, 2009 - R$4,826).

(f) Assets pledged as guarantee

On September 30, 2010 and December 31, 2009 the Company held assets in the amount of R$249,034 pledged as guarantee to Request of Special Payment in Installment - Paes (Note 12).

F-23 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

(g) Non-operating Assets

On September 30, 2010 and December 31, 2009, the Company had the amount of R$25,371 and R$26,411 respectively, mainly related to lands lend, free of charge, to associations, support entities, non-governmental organizations and to the DAEE - Departamento de Aguas e Energia Eletrica, among others.

(h) Revaluation

Property, plant and equipment items were revaluated in 1990 and 1991 and have been depreciated at annual rates which take into consideration the estimated remaining economic useful lives.

As permitted by CVM Instruction 197/93, the Company did not record a provision for the tax effects (deferred taxes) on the surplus of the revaluation of property, plant and equipment carried out in 1990 and 1991. Had the income tax and social contribution on the revaluation reserve been accounted for, the unrealized amount at September 30, 2010 would be R$328,723 (R$348,956 at September 30, 2009). The amounts of R$35,816 and R$67,366 from the revaluation reserve were realized in the nine-month period ended on September 30, 2010 and 2009, respectively.

The Company elected to keep the Revaluation Reserve recorded until its respective realization.

(i) Assets fully depreciated in operation

On September 30, 2010 and December 31, 2009 the gross book value of the fully depreciated assets that are still in use amounted to R$979,733 and R$955,893, respectively.

(j) Public Private Partnership - PPP

- CABSPAT

Sabesp and CAB-Sistema Produtor Alto Tietê S.A, a special purpose entity – SPE, formed by Galvão Engenharia S.A. and Companhia Águas do Brasil – CAB Ambiental, signed the Alto Tiete Public Private Partnership agreement in June 2008.

The service agreement will mature in 15 years. This agreement includes the expansion of the Taiaçupeba water treatment plant capacity to 70 million of liters. However, the SPE will provide maintenance on the dams and sludge treatment service to the Alto Tietê system. Such project will permit investments which will expand the plant capacity from 10 to 15 thousand liters of water per second, which allows the Company to attend the total demand in the region. On September 30, 2010 the amount recognized as fixed assets related to the SPE, that is still in progress, totaled R$ 254,370 (R$129,232 on December 31, 2009).

F-24 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

In the nine-month period ended September 2010 we paid to CAB the amount of R$38,532, of which R$23,115 were recognized as expenses and R$15,417 were amortized as construction expenditures.

9. INTANGIBLE

September 30, 2010 December 31, 2009 Concessions (i) 512,400 504,145 Program contracts (commitments) (ii) 303,825 258,802 License of Use (Software’s) (iii) 5,785 9,565 Program Contracts - investments performed (iv) 894,628 772,791 Contrato de Prestação de Serviço Público – (SP) (vi) 7,348,740 - New Businesses (v) 8,741 - Total 9,074,119 1,545,303

(i) Concessions

From 1999 through 2006, the negotiations for new concessions were conducted on the basis of the economic and financial profit or loss of the transaction, determined in an valuation report issued by independent appraisers.

The amount determined in the respective contract, after the transaction is closed with the municipal authorities, realized throuhg the subscription of the Company´ shares or in cash, is recorded as “concession contract” and amortized over the period of the related concession (usually 30 years). As of September 30, 2010 and December 31, 2009 there were no amounts outstanding related to these payments to the municipalities.

The net amount presented relates to concessions with the following municipalities:

December September 30, 2010 31, 2009 Accumulated Cost amortization Net Net Agudos 10,285 (3,166) 7,119 7,291 Bom Sucesso do Itararé 955 (133) 822 829 Campo Limpo Paulista 21,204 (5,321) 15,883 14,949 Conchas 4,258 (1,011) 3,247 3,278 Duartina 2,105 (553) 1,552 1,558 Estância de Serra Negra 15,709 (3,554) 12,155 12,502 Itapira 16,360 (1,330) 15,030 15,030 Itararé 6,543 (2,263) 4,280 4,457

F-25 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

December September 30, 2010 31, 2009 Accumulated Cost amortization Net Net Marabá Paulista 1,898 (339) 1,559 1,623 Miguelópolis 11,728 (2,379) 9,349 9,718 Osasco 317,263 (97,599) 219,664 207,045 Paraguaçu Paulista 27,165 (6,489) 20,676 20,247 Paulistânia 222 (54) 168 166 Sandovalina 2,595 (430) 2,165 2,218 Santa Maria da Serra 1,270 (397) 873 837 São Bernardo do Campo 237,464 (52,904) 184,560 190,527 Várzea Paulista 18,258 (4,960) 13,298 11,870 Total 695,282 (182,882) 512,400 504,145

The amortization of intangible assets is performed during the effective period of the concession agreements of the related municipalities.

In the nine-month period ended September 30, 2010 and 2009, amortization expenses related to concession intangible rights totaled R$17,726 and R$17,217, respectively.

(ii) Program Contracts (commitments)

After the enactment of the regulatory framework in 2007, the renewals of concession agreement are made through program contracts. In some of them, the Company assumed commitments to financially participate in social environmental sanitation actions.

On September 30, 2010 and December 31, 2009, these commitments were recorded as intangible assets in the amount of R$323,765 and R$271,194, respectively, deducted by the present value adjustment in the amount of R$91,003 (on December 31, 2009 – R$81,726) at an interest rate of 6% plus IPCA.

These assets are being amortized according to the effective period of the program contract (usually 30 years).

The committed amounts are related to the following municipalities:

December September 30, 2010 31, 2009 Accumulated Municipality Cost amortization Net Net Alfredo Marcondes 70 (6) 64 65 Aparecida D’Oeste 45 (3) 42 43

F-26 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

December September 30, 2010 31, 2009 Accumulated Municipality Cost amortization Net Net Auriflama 110 (3) 107 110 Avaré 5,000 (375) 4,625 4,750 Bento de Abreu 50 (5) 45 47 Bocaina 800 (73) 727 747 Botucatu 28,979 (403) 28,576 - Caçapava 9,000 (675) 8,325 8,550 Cajuru 2,236 (31) 2,205 - Campos do Jordão 3,000 (308) 2,692 2,767 Capão Bonito 2,000 (150) 1,850 1,900 Emilianópolis 112 (11) 101 103 Espírito Santo do Pinhal 5,179 (101) 5,078 - Fartura 243 (18) 225 231 Fernandópolis 9,500 (871) 8,629 8,867 Franca 20,676 (2,182) 18,494 19,010 Indiaporã 250 (19) 231 237 Irapuã 260 (6) 254 260 Jales 4,426 (455) 3,971 4,082 Lorena 9,000 (825) 8,175 8,400 Magda 320 (8) 312 320 Mococa 8,843 (663) 8,180 8,401 Mombuca 196 (18) 178 184 Monte Alto 5,000 (389) 4,611 4,736 Novo Horizonte 5,000 (375) 4,625 4,750 Osvaldo Cruz 2,336 (33) 2,303 - Pindamonhangaba 16,000 (1,289) 14,711 15,111 Piratininga 350 (27) 323 331 Planalto 39 (4) 35 36 Platina 30 - 30 - Pongaí 35 (1) 34 35 Quatá 1,000 (25) 975 1,000 Riolândia 2,643 (198) 2,445 2,511 Santa Rosa do Viterbo 3,697 (62) 3,635 - São João da Boa Vista 16,700 (1,253) 15,447 15,865 São José dos Campos 142,945 (8,339) 134,606 138,179 São Luiz Paraitinga 600 (55) 545 560 São Manuel 1,300 (97) 1,203 1,235 Tatuí 9,795 (136) 9,659 - Tupã 5,540 (431) 5,109 5,248 Valentim Gentil 140 (13) 127 131 Zacarias 320 (4) 316 - Total 323,765 (19,940) 303,825 258,802

F-27 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

In the nine-month period ended September 30, 2010 and 2009, the amortization expenses related to the program contracts totaled R$7,549 and R$7,015, respectively.

On September 30, 2010, the amountnot yet disbursed related to the commitments under program contracts are recorded in “other obligations”, an amount of R$67,317 in current liabilities, and an amount of R$105,246 in non-current liabilities.

(iii) License for Use (Software)

The net amount of the amortizations of the license for the use of Software on September 30, 2010 amounted to R$5,785 (in December 31, 2009 - R$9,565).

(iv) Program Contracts - Investments performed

It refers to renewals of concession contracts formerly related to full concession for operating concession through program contracts that have the purpose to provide public services of water supply and sanitation sewage to municipalities, where the Company has the ownership and management of the assets acquired or constructed during the term of these contracts (30 years).

On September 30, 2010, the Company reclassified the net amount of R$ 5.965.092 from propert, plant and equipment to intangible assets with respect to execution of the agreement “Contrato de Prestação de Serviços Públicos de Abastecimento de Água e Esgotamento Sanitário” between the São Paulo State Government and Sabesp for the period of 30 years, in accordance with the Municipal Law 14934/09.

December 31, September 30, 2010 2009 Accumulated Cost Net Net Amortization

In operation Water system Land 7,564 (470) 7,094 7,251 Buildings 50,069 (3,185) 46,884 45,775 Connections 33,107 (1,849) 31,258 28,088 Water meters 19,970 (1,144) 18,826 17,007 Network 95,464 (5,306) 90,158 82,888 Wells 12,595 (728) 11,867 11,781 Equipments 17,449 (2,374) 15,075 13,748 Others 1,790 (119) 1,671 5,500 Subtotal 238,008 (15,175) 222,833 212,038

Sewage system Land 2,867 (172) 2,695 2,230 Buildings 65,626 (3,560) 62,066 46,765 Connections 39,524 (2,251) 37,273 36,297 Network 132,360 (7,666) 124,694 116,450

F-28 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

Equipments 21,474 (2,737) 18,737 16,762 Outros 2,051 (134) 1,917 9,435 Subtotal 263,902 (16,520) 247,382 227,939

General use Land 9 - 9 9 Buildings 392 (13) 379 366 Transportation equipment 6,097 (382) 5,715 5,765 Information Technology Equipment 1,217 (70) 1,147 1,097 Furniture, Fixture and Equipment 6,261 (475) 5,786 5,844 Subtotal 13,976 (940) 13,036 13,072

Total in operation 515,886 (32,635) 483,251 453,049

Work in progress Water systems 126,568 - 126,568 74,516 Sewage systems 284,462 - 284,462 244,891 Others 347 - 347 335 Total in progress 411,377 - 411,377 319,742

Total 927,263 (32,635) 894,628 772,791

The amortization of the assets is performed during the effectiveness of the program contracts.

(v) New Businesses

In August, 2009, it was signed a specialized technical services technology transfer agreement with the Companhia of Saneamento de Alagoas (CASAL) to implement a program of loss reduction and revenue evasion of the Municipalty of Maceio, by 60 months.

On September 30, 2010 the work in progress related to this agreement amounted to R$8,741.

(vi) Sao Paulo State Government agreement

On September 30, 2010 the Company reclassified the net carrying value in the amount of R$ 7,348,740 property, plant and equipment to intangible regarding the execution of the “Provision of Public Services of Water Supply and Sanitation Sewage Agreement” between the State Government and Municipality of Sao Paulo and Sabesp, for the period of 30 years, authorized by municipal law 14934/09.

F-29 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

December 31, September 30, 2010 2009 Accumulated Cost Net Net Amortization In operation Water system Land 587,726 - 587,726 - Buildings 1,410,492 (942,179) 468,313 - Connections 626,675 (286,469) 340,206 - Water meters 190,615 (95,997) 94,618 - Network 1,604,317 (688,744) 915,573 - Wells 4,207 (1,891) 2,316 - Equipments 299,081 (225,405) 73,676 - Others - - - - Subtotal 4,723,113 (2,240,685) 2,482,428 - Sewage system Land 208,056 - 208,056 - Buildings 1,351,391 (645,294) 706,097 - Connections 484,340 (248,234) 236,106 - Network 3,116,391 (879,470) 2,236,921 - Equipments 415,803 (320,320) 95,483 - Outros - - - - Subtotal 5,575,981 (2,093,318) 3,482,663 -

Total in operation 10,299,094 (4,334,003) 5,965,091 -

Work in progress Water systems 906,163 - 906,163 - Sewage systems 477,374 - 477,374 - Others 112 - 112 - Total in progress 1,383,649 - 1,383,649 - Total 11,682,743 (4,334,003) 7,348,740 -

F-30 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

10. LOANS AND FINANCINGS

(i) Outstanding balance of loans and financings

September 30, 2010 December 31, 2009 Non- Non- Final Annual Monetary Current current Total Current current Total Guarantees maturity interest rate adjustment Financial Institution: COUNTRY União Federal / 309,220 898,037 1,207,257 288,833 1,127,136 1,415,969 Sao Paulo Gov. 2014 8.50% UPR Banco do Brasil State and own resources Debentures 6th - - - 225,755 - 225,755 Unsecured 2010 11% IGP-M Issuance Debentures 7th - - - 121,380 - 121,380 Unsecured 2010 10.8% IGP-M Issuance Debentures 8th 451,266 - 451,266 - 418,535 418,835 Unsecured 2011 10.75% IGP-M Issuance Debentures 9th - 228,279 228,279 - 223,741 223,741 Unsecured 2015 CDI+2.75% IPCA Issuance (1st series) and 12.87% (2nd series) Debentures 10th - 277,319 277,319 - 274,476 274,476 Unsecured 2020 TJLP+1.92% IPCA Issuance (1st series and 3rd series) and 9.53% (2nd series) Debentures 11th - 1,205,528 1,205,528 - - - Unsecured 2015 CDI+1.95% Issuance (1st series) and CDI+1.4% (2nd series) Debentures 12th - 499,975 499,975 - - - Unsecured 2025 TR+9.5% Issuance Caixa 87,163 767,964 855,127 78,871 679,992 758,863 Own Resources 2010/2032 UPR 6.8% Econômica (weighted) Federal Promissory - 599,795 599,795 - 898,447 898,447 Own Resources 2011 CDI + 0,65% Notes FIDC - Sabesp I 27,778 - 27,778 55,556 13,889 69,445 Own Resources 2011 CDI + 0.70% Banco Nacional 43,261 51,379 94,640 42,857 83,940 126,797 Own Resources 2013 3% + TJLP de LIMIT 6% Desenvolvimento Econômico e Social - BNDES Banco Nacional - 130,474 130,474 - 130,473 130,473 Own Resources 2019 2.5% + TJLP de LIMIT 6% Desenvolvimento Econômico e Social - BNDES Baixada Santista Banco Nacional 681 37,320 38,001 - 14,602 14,602 Own Resources 2023 2.15% + de TJLP LIMIT Desenvolvimento 6% Econômico e Social – BNDES PAC

F-31 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

Banco Nacional - 216,979 216,979 - - - Own Resources 2025 1.92% + de TJLP LIMIT Desenvolvimento 6% Econômico e Social – BNDES ONDA LIMPA Banco Santander 2,340 - 2,340 - - - Own Resources 2010 CDI + 1,05% Others 3,294 5,322 8,616 3,276 11,575 14,851 Own Resources 2011/2018 12% / CDI / UPR TJLP+ 6% Interests and 100,883 - 100,883 112,297 7,961 120,258 charges Total Domestic 1,025,886 4,918,371 5,944,257 928,825 3,884,767 4,813,592

FOREIGN CURRENCY Inter-American 63,693 539,894 603,587 64,250 588,085 652,335 Federal 2016/2025 3.00% a Currency Development Government 4.13% Basket Bank - BID (i) Var. + US$ 356,267 US$ thd. (Dec/09 - US$ 374,647 thd) Euro Bonds - - 237,188 237,188 - 243,768 243,768 2016 7.5% US$ US$ 140,000 thd (Dec/09 - US$ 140,000 thd) JICA - Yens 11,695 421,020 432,715 - 400,932 400,932 Federal 2029 1.8% and Yens 21,316,000 thd Government 2.5% (i) (Dec/09 - Yens 21,316,000 thd) BID 1983AB - 40,563 379,827 420,390 - 431,911 431,911 2023 2,4% to US$ US$ 250,000 thd 2,9% (i) (Dec/09 - US$ 250,000 thd.) Interests and 21,805 - 21,805 17,462 - 17,462 charges Total 137,756 1,577,929 1,715,685 81,712 1,664,696 1,746,408 International TOTAL OF 1,163,642 6,496,300 7,659,942 1,010,537 5,549,463 6,560,000 LOANS AND FINANCINGS

The exchang rates as of September 30, 2010: US$ 1.6942; Yen 0.0203 (December 31, 2009: US$ 1.7412; Yen 0.018809).

On September 30, 2010 the Company did not have short term balances of loans and financings outstanding.

F-32 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

(i) The annual interest rates is summarized in the general chart by contract.

September 30, 2010 December 31, 2009 Current Non-current Total Current Non-current Total interest rate BID 41,574 270,226 311,800 41,517 290,622 332,139 4,13% Contract 713 BID 4,706 25,884 30,590 4,837 29,020 33,857 3,00% Contract 896 BID 17,413 243,784 261,197 17,896 268,443 286,339 4,02% Contract 1212 Jica Consulting 6,695 241,034 247,729 - 229,539 229,539 1,80% Jica Work 5,000 179,986 184,986 - 171,393 171,393 2,50% BID 13,032 155,176 168,208 - 174,120 174,120 2,90% 1983 A Bid 16,942 151,352 168,294 - 174,120 174,120 2,60% 1983 B1 BID 10,589 73,299 83,888 - 87,060 87,060 2,40% 1983 B2

(ii) The table presented below was prepared in accordance with the CPC 08 to provide the annual effects of the financial expenses from funding costs under the respective effective interest rate.

2016 and Monthly 2010 2011 2012 2013 2014 2015 thereafter Total IRR Debentures - 9th issuance - 1st series 80 322 323 272 - - - 997 0.027073% Debentures - 9th issuance - 2nd series 62 248 249 249 250 208 - 1,266 0.017393% Debentures - 10th issuance - 1st series 9 36 36 36 36 37 181 371 0.003956% Debentures - 10th issuance - 2nd series 10 39 39 39 39 39 195 400 0.003944% Debentures - 10th issuance - 3rd series 14 55 55 55 55 55 269 558 0.003966% Debentures - 11th issuance - 1st series 357 1,429 1,432 1,435 1,437 360 - 6,450 0.014806% Debentures - 11th issuance - 2nd series 301 1,207 1,211 303 - - - 3,022 0.024967% Debentures - 12th issuance - sole series - 2 2 2 2 2 15 25 0.000028%

F-33 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

2016 and Monthly 2010 2011 2012 2013 2014 2015 thereafter Total IRR Promissory Notes 123 82 - - - - - 205 0.006110% BNDES (National Bank for Economic and Social Development) ONDA LIMPA 6 26 26 26 26 26 237 373 0.002184% AB Loan A 26 103 103 103 103 104 771 1,313 0.005301% AB Loan B1 32 129 129 129 129 129 574 1,251 0.006621% AB Loan B2 19 77 77 78 78 78 188 595 0.007939% Bird 5 19 19 19 19 19 347 447 0.000888% Total 1,044 3,774 3,701 2,746 2,174 1,057 2,777 17,273

There is no premium at the time the resources are provided.

(iii) On September 1st, 2010 the 6th issuance of debentures, 3rd series, was fully settled.

(iv) On August 30, 2010 a R$600,000 Promissory Notes was issued as a bridge loan, related to an advance to the 13th issue of debentures.

The net proceeds obtained from the 13th issuance of debentures will be fully used to redeem the 60 promissory notes of the 5th issuance of debenture.

(v) On October 28, 2009 it was signed by “The World Bank” – International Bank of Development and Reconstruction – BIRD, the BIRD-7662BR contract, in the amount of US$100,000 thousand. In September 2010 the initial commission totaling US$250 thousand was paid. This amount was recorded as funding costs and will be amortized over the period of the contract, until March 2034.

(vi) Repayment schedule of loans and financing

The total debt to be paid through the end of 2010 is R$217,560.The amount of loans denominated in US dollars is equivalent to R$42,483. The amount of interest and principal of loans denominated in Reais is R$175,077.

2016 and BANK 2010 2011 2012 2013 2014 2015 TOTAL thereafter COUNTRY Federal Government/Banco do Brasil 74,866 315,841 343,772 374,173 98,605 - - 1,207,257 Caixa Econômica Federal (CEF) 21,078 89,600 100,136 101,968 63,551 41,445 437,349 855,127 Debentures - 484,267 235,988 579,597 368,333 391,059 603,123 2,662,367 Promissory Notes - 599,795 - - - - - 599,795

F-34 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

2016 and BANK 2010 2011 2012 2013 2014 2015 TOTAL thereafter FIDC - SABESP I 13,889 13,889 - - - - - 27,778 BNDES (National Bank for Economic and Social Development) 10,710 42,841 36,913 4,176 - - - 94,640 BNDES (National Bank for Economic and Social Development) Santos Lowlands - - 16,309 16,309 16,309 16,309 65,238 130,474 BNDES (National Bank for Economic and Social Development) PAC - 1,475 3,176 3,176 3,176 3,176 23,822 38,001 BNDES (National Bank for Economic and Social Development) ONDA LIMPA - - 12,518 16,691 16,691 16,691 154,388 216,979 Other 908 3,930 453 451 489 551 1,834 8,616 Interest and charges 53,626 47,257 - - - - - 100,883 Total - Domestic 175,077 1,598,895 749,265 1,096,541 567,154 469,231 1,285,754 5,941,917

ABROAD BID 23,140 63,693 63,693 63,693 63,693 63,693 261,982 603,587 Eurobonds ------237,188 237,188 JICA - 11,695 23,390 23,390 23,390 23,390 327,460 432,715 BID 1983AB - 40,262 40,262 40,262 40,262 40,262 219,080 420,390 Interest and charges 19,343 2,462 - - - - - 21,805 Total Abroad 42,483 118,112 127,345 127,345 127,345 127,345 1,045,710 1,715,685 Grand Total 217,560 1,717,007 876,610 1,223,886 694,499 596,576 2,331,464 7,657,602

(vii) Covenants

As of September 30, 2010, the Company was compliant with all covenants.

(viii) Tiete III

Loan Agreement Nr. 2202/OC-BR signed on September 03, 2010 between SABESP – Companhia de Saneamento Basico do Estado de Sao Paulo and BID – Development Inter-American Bank, for financing the River Tiete’s De-pollution Program – III Stage partially. The investment amounts to US$800 million is comprised by US$600 million from loan and US$200 million from the Company´s resources. The contractual total financing period is 25 years, with a six-year grace period. Interests: Uni-monetary mechanism with USD-LIBOR interest rates , calculated quarterly, as set forth in the BID’s policies and procedures.

F-35 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

11. DEFERRED TAXES AND CONTRIBUTIONS

(a) Balances

September 30, December 31, 2010 2009 In current assets (i) Deferred income tax 203,552 190,111 Deferred social contribution tax 73,279 68,440 276,831 258,551 In non current assets (ii) Deferred income tax 418,141 389,802 Deferred social contribution tax 150,530 140,329 568,671 530,131 In current liabilities (iii) Deferred income tax 103 209 Deferred social contribution tax 37 75 Deferred PASEP (tax on revenue) 10,745 14,352 Deferred COFINS (tax on revenue) 7,584 23,276 18,469 37,912 In non-current liabilities (iv) Deferred income tax 56,554 57,780 Deferred social contribution tax 15,850 16,291 Deferred PASEP (tax on revenue) 23,299 20,807 Deferred COFINS (tax on revenue) 73,458 61,982 169,161 156,860

Nine-month period ended September September 30, 2010 30, 2009 To the result

Income tax (466,198) (422,056) Deferred income tax 43,111 106,044 (423,087) (316,012)

Social contribution tax (168,644) (154,001) Deferred social contribution 38,495 tax 15,520 (153,124) (115,506)

(i) Current assets

Substantially calculated based on timing differences in the amount of R$814,208 (December 31, 2009 - R$760,443).

F-36 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

(ii) Non-current assets

Substantially calculated based on timing differences in the amount of R$1,672,562 (Dec/2009 - R$1,559,210) related to the income tax and social contribution.

The Company’s management expects to realize the non-current assets, mentioned on item (ii) in 2011 in the same proportion of 2010, and the remaining balance in the subsequent year of 2012.

(iii) Current Liabilities

- Income Tax and Social Contribution

Substantially calculated based on timing differences in the amount of R$413, related to the income tax and social contribution.

- Pasep and Cofins

Calculated substantially on billings to government entities, and the liability is determined and the allowance is recognized when the service is provided, and its settlement when the invoices are received.

(iv) Non-current liabilities

- Income and social contribution taxes

Substantially calculated based on timing differences in the amount of R$226,217 (Dec/2009 - R$231,120) related to the income tax and R$176,110 (Dec/2009 - R$181,013) related to the social contribution.

- Pasep and Cofins

Calculated substantially on billings to government entities, and the obligation is determined and the allowance is recognized when the service is provided, and its settlement when the invoices are received.

(b) Break-down of deferred taxes and contributions

September 30, December 31, 2010 2009

In current assets Provisions for contingencies 276,831 258,551

In non-current assets

F-37 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

September 30, December 31, 2010 2009 Provision for contingencies 256,889 282,960 Provision for social security obligations 169,123 160,094 Others 142,659 87,077 568,671 530,131 Total deferred tax assets 845,502 788,682

In current liabilities Costs in the issuance of securities 140 284 Public entity revenues 18,329 37,628 18,469 37,912 In non-current liabilities Costs in the issuance of securities 1,066 Public entity revenues 72,404 73,005 Public entity income 96,757 82,789 169,161 156,860 Total deferred tax liabilities 187,630 194,772

The amounts recorded as income and social contribution tax expenses in the interim financial statements are reconciled to the statutory rates provided for in law, as shown below: Nine-month period ended September 30, 2010 September 30, 2009 Income before taxes on income 1,650,261 1,348,124 Statutory rate 34% 34% Tax expense at statutory rate (561,089) (458,362) Permanent differences Realization of revaluation reserve (12,177) (22,905) Interests on Shareholders’ Equity - 47,253 Other differences (2,945) 2,496 Income tax and social contribution (576,211) (431,518)

Current income tax and social contribution (634,842) (576,057) Deferred income tax and social contribution 58,631 144,539 Effective tax rate 35% 32%

(d) Transitional Taxation Regime – RTT

For purposes of calculation of the income tax and social contribution on net income of the fiscal years 2009 and 2008, the Company and its subsidiaries elected the RTT,

F-38 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated ) which allows the legal entity to eliminate the accounting effects of Law 11.638/07 and the PM 449/08, converted into Law 11.941/09, by means of registration in the actual profit book – LALUR or auxiliary ledgers, without any change to the accounting records.

In 2010, the Company has also adopted the same tax standards adopted in 2008 and 2009, once the RTT shall be in force until the effectiveness of the law that regulates the tax effects of the new accounting standards, seeking for tax neutrality.

12. PROGRAM PAES

The Company applied for enrollment in PAES on July 15, 2003, in accordance with Law No. 10.684 of May 30, 2003, and included in its application the debts related to COFINS and PASEP which were involved in a legal action challenging application of Law 9.718/98, and the outstanding balance under the Tax Recovery Program (REFIS). The total original amount included in PAES was R$316,953, as follows:

Taxes Main Fines Interests Total

Cofins 132,499 13,250 50,994 196,743 Pasep 5,001 509 2,061 7,571 Refis 112,639 - - 112,639 Total 250,139 13,759 53,055 316,953

The debt is being paid in 120 months. The amounts paid in the nine-month period ended September 30, 2010 and 2009 were R$ 25,931 and R$ 24,911, respectively, In the nine- month period ended September 30, 2010 and 2009, the amounts of R$ 3,211 and R$ 4,346, respectively, were recorded as financial expenses. The outstanding balance on September 30, 2010 totaled R$96,321. The assets pledged as guarantee for the previous Refis Program, in the amount of R$249,034 continue to guarantee the amounts of the Paes Program.

13. SOCIAL SECURITY LIABILITIES

The Company sponsors Fundação Sabesp de Seguridade Social - Sabesprev, an entity established in August 1990 with the main purpose of managing the pension plan and the welfare program for Sabesp’s employees.

As from July 2010, aiming at resolving the deficit related to the Defined Benefit Plan (BD), Sabesp and Sabesprev have structured a process through which the participants may elect to move from the Defined Benefit Plan to a Defined Contribution Plan, the Sabesprev Mais.

F-39 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

The period for the plan migration, from July to November, 2010, was suspended through an injunctive relief granted by the Court of Justice of the State of Sao Paulo, on October 20, 2010 until the claims from the parties involved are taken into consideration.

On September 30, 2010, after the migration of the participants, the Defined Benefit Plan remained with 16,807 participants and the Defined Contribution Plan remained with 3, 120 participants, respectively.

The monthly contributions to the defined benefit plan correspond to 2.1% from the Company and 2.3% from the participants.

The contribution from the participants presented above is the average, as the discount rates varies due to the salary range, from 1% to 8.5%.

With respect to the defined contribution pension plan, , the contributions from the sponsor represents 100% over the total basic contribution from the participants.

As set forth by CVM regulation, the gains arising from early reduction of a plan must be recognized upon its occurrence. Thus, the amount of the unrecognized actuarial gain, of R$178,583, must be offset by the gain from the migration plan.

The break-down of the plan migration is presented in the table below:

ACTUARIAL RECONCILIATION OF (ASSETS) BEFORE AFTER GAIN IN AND LIABILITIES MIGRATION MIGRATION MIGRATION Actuarial Obligations 1,488,747 (107,159) 1,381,588 Fair value of plan assets (1,133,150) (93,877) (1,039,273) Present value of unfunded obligations 355,597 (13,282) 342,315 Unrecognized actuarial (gains) or losses (165,301) (956) (164,345) Unrecognized past service cost - - - Total Net Actuarial Liability/(Asset) 520,898 (14,238) 506,660

Regarding the Defined Contribution Plan, the commitment for all participants who migrated up to September, 2010, as per the actuarial report, amounted to R$25,321, of which, R$14,232 relates to Active and R$11,089 relates to the inactive participants. The Company has already made payments in the amount of R$8,183 up to September 30, 2010.

On September 30, 2010, based on an independent actuarial report, calculated by the Projected Credit Unit, the Company had a net actuarial commitment with the Defined Benefit Plan in the amount of R$506,660 (R$480,103 in 2009) which represents the difference between the present value of the Company’s liabilities related to the employees, retirees and pensioners and the guaranted assets, demonstrated as follows:

F-40 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

(i) Conciliation of Assets and Liabilities September 30, December 2010 31, 2009

Present value of the actuarial obligations (1,381,588) (1,422,993) Fair value of assets 1,039,273 982,422 Gains to be recognized in future years (164,345) (39,532) Net liability recognized in the balance sheet (506,660) (480,103)

Nine-month period ended (ii) Expenses recognized in the income September 30, statement 2010 December 31, 2009

Cost of current service 21,059 31,116 Cost of interests 115,764 155,514 Proceeds expected from the plan assets (73,682) (92,309) Employee’s contributions (11,418) (21,235) Total 51,723 73,086

Sponsor’s contribution (10,928) -

Total Expenses 40,795 73,086

(iii) Activity of Net Actuarial Liability

Present Value of the net actuarial obligation in the beginning of the year (480,103) (419,871) Cost of current service (21,059) (31,116) Cost of interests (115,764) (155,514) Proceeds expected from the plan assets 73,682 92,309 Employee’s contributions 11,418 21,235 Impact resulting from the reduction of the benefit plan 14,238 - Total (517,588) (492,957) Company’s actual contributions in the year 10,928 12,854 Present value of the plan assets in the end of the year (506,660) (480,103)

(iv) Evolution of the Fair Value of the Assets

Fair value of the plan assets in the beginning of the year 982,422 976,545 Actual proceeds of the fair value of the assets 77,724 19,501 Actual contributions in the year 22,346 34,089 Benefits paid (43,220) (47,713) Fair value of the plan assets at the end of the year 1,039,272 982,422

F-41 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

(v) Evolution of the Present Value of the Obligations

Present value of the obligations in the beginning of the year 1,422,993 1,433,710 Cost of current service 21,059 31,116 Cost of interests 115,764 155,514 Benefits paid (43,220) (47,713) Loss in the present value of the obligations (135,008) (149,634) Present value of the obligations at the end of the year 1,381,588 1,422,993

Three-month Twelve month- period ended December period ended (vi) Estimated Expenses 31, 2010 December 31, 2010

Cost of current service 6,141 28,079 Cost of interests 36,706 154,352 Expected proceeds of the plan assets (27,952) (98,242) (Gain)/Loss Amortization (594) - Employee’s Contributions (10,114) (23,657) Total 4,187 60,532

(vii) Actuarial Assumptions

Several statistics and other factors aim at anticipating future events for the calculation of actuarial expense and liability related to these plans. These factors include assumptions on discount rate, expected rate of return on assets and future salary increase, in addition to subjective factors, such as layoff ratios, turn over and mortality. The actuarial assumptions used by the Company are regularly reviewed and may differ significantly from current results according to changes in market and economic conditions, regulatory factors, legal regulations, increase or decrease in layoff ratios or in life expectancy of the participants. These differences may result in a significant impact on the pension obligation expense recognized by the Company.

Economic Assumptions September 30, December 31, 2010 2009

Discount rate 10,85% p.a. 10,85% p.a. Expected rate of return on assets 10,85% p.a. 10,85% p.a. Future salary increase 6,08% p.a. 6,08% p.a. Social security benefits increase and the limits 4,00% p.a. 4,00% p.a. Capacity factor - Salaries 98% 98% - Benefits 98% 98%

F-42 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

Economic Assumptions September 30, December 31, 2010 2009

Demographic assumptions for Set - 2010 2009 Mortality table AT 83 AT 83 Disabled mortality table RRB 44 RRB 44 Disable entry table RRB 44 RRB 44 Turn over table Prudential Prudential Retirement age First age entitled First age entitled to one of the to one of the benefits benefits % of married participants at the retirement date 95% 95% Age difference between the participant and the spouse Wives are 4 Wives are 4 years younger years younger than husbands than husbands

Assistance Plan

Managed by the Fundaçao Sabesp of Seguridade Social – Sabesprev, it is comprised by optional health plan, of free choice, maintained by contributions from the participants and the sponsor, which were the following in the year:

Company: 7.5% (2008-7.1%) average on gross payroll; Participants: 3.21% on base salary and bonuses, which corresponds to 2.3% average on the gross payroll.

14. PROFIT SHARING

In the quarter ended September 30, 2010 R$11,778 was accrued, which is recorded under payroll and related charges, in current liabilities, related to the period from January to December 2010, based on the attainment of goals set during negotiations between the Company and entities representing the employees.

15. PROVISIONS FOR CONTINGENCIES

Interest, monetary December restatements September 31, 2009 Additions Deductions and reversals 30, 2010 Customers 864,938 75,103 (154,296) (60,710) 725,035 Suppliers 342,053 2,815 (6,991) 16,728 354,605 Other civil 26,134 (17,861) 5,613 lawsuits 161,856 175,742 Tax 28,812 28,400 (3,086) 9,172 63,298 Labor 101,463 29,728 (9,757) 7,393 128,827

F-43 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

Interest, monetary December restatements September 31, 2009 Additions Deductions and reversals 30, 2010 Environmental 58,531 11,584 (17,166) 7,733 60,682 Subtotal 1,557,653 173,764 (209,157) (14,071) 1,508,189 Escrow deposits (88,833) (15,838) 7,382 (8,832) (106,121) Total 1,468,820 157,926 (201,775) (22,903) 1,402,068

Management, based on analysis with its legal counsels, recorded a provision in an amount considered sufficient to face probable losses in judicial law suits. In current liabilities, in the “ Provisions” line item, the amounts related to judicial law suits in execution phase amount to R$759,000 (Dec/2009 – R$643,863) in non-current liabilities, in the “ Provisions” line item, amounts to R$643,068 (Dec/2009 – R$824,957).

(i) Customers - Approximately 1,420 lawsuits were filed by commercial customers, which claim that their tariffs should be equal to the tariffs of another consumer category, and therefore they claim the refund of the amounts collected by Sabesp. The Company was granted both favorable and unfavorable final decisions at several courts, and recognized provisions when the likelihood of loss is considered probable.

(ii) Suppliers - Suppliers’ claims include lawsuits filed by some building companies alleging an underpayment of monetary adjustments, withholding of amounts related to the understatement of official inflation rates after the Real economic plan, and the economic and financial non-feasibility of the agreements. These lawsuits are in progress at different courts and a provision is recognized if the likelihood of loss is considered probable.

(iii) Other civil lawsuits - refer mainly to indemnity claims for property damage, pain and suffering, and loss of profits allegedly caused to third parties, filed at different court levels, duly accrued when classified as probable losses.

(iv) Tax lawsuits - the provision for tax contingencies refers mainly to issues related to tax collections challenged due to differences in the interpretation of law by the Company’s legal counsel, duly accrued if classified as probable losses.

(v) Labor lawsuits - the Company is a party to labor lawsuits, involving issues such as overtime, health hazard premium and hazardous duty premium, prior notice, change of function, salary equalization, and other. Part of the amount involved is in provisional or final execution at various court levels, and thus is classified as a probable loss and accordingly a provision was recognized.

(vi) Environmental lawsuits - refer to several administrative proceedings and lawsuits filed by government entities, including Companhia de Tecnologia de Saneamento Ambiental - Cetesb and the São Paulo State Public Prosecution Office for

F-44 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated ) the imposition of fines for environmental damages allegedly caused by the Company. The amounts recognized in provision do not always represent the final amount to be disbursed as indemnity of alleged damages, in view of the current stage in which such lawsuits are and Management’s impossibility to reasonably estimate the amounts of future disbursements.

Lawsuits with possible likelihood of loss

The Company is a party to lawsuits and administrative proceedings related to environmental, tax, civil and labor lawsuits, which are considered by its legal counsel as possible losses, and are not recorded in the books. The amount attributed to these lawsuits and proceedings is approximately R$2,255,000 as of September 30, 2010 (Dec/2009 - R$1,949,800).

16. SHAREHOLDERS’ EQUITY

(a) Authorized capital

The Company is authorized to increase its capital up to R$10,000,000, based on a Board of Directors’ resolution, after submission to the Supervisory Boards.

(b) Subscribed and paid-up capital

Subscribed and paid-up capital is represented by 227,836,623 registered common shares, with no par value, held as follows: September 30, 2010 Number of shares % State Finance Department 114,508,085 50.26 Companhia Brasileira de Liquidação e Custódia 52,444,354 23.02 The Bank Of New York ADR Department (Equivalent in shares) (*) 60,222,764 26.43 Other 661,420 0.29 227,836,623 100.00 (*) Each ADR is equal to 2 shares

Shareholders are entitled to a minimum mandatory dividend of 25% of the adjusted net income, calculated according to Brazilian Corporate Law. No interests accrue on dividends approved, and the amounts not claimed within 3 years from the date of the General Shareholders´ Meeting that approved them will prescribe in favor of the Company.

F-45 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

(d) Capital reserve

Capital reserve includes tax incentives and donations through December 31, 2007.

(e) Revaluation reserve

As provided for by CVM Instruction No. 197/93, the Company decided not to record income and social contribution taxes on the revaluation reserve of property, plant and equipment recognized in 1991.

The reserve is being realized as a contra entry to the caption “retained earnings”, on the same proportion as the depreciation and write-off of the respective assets.

The balances of the revaluation reserve will be maintained until their effective realization.

(f) Changes in “retained earnings”

Setptember Sepember 30, 30, 2010 2009 Net Income 1,074,050 916,606 Realization of Revaluation Reserve 35,816 67,366 Interests on Shareholders’ Equity - (138,980) Current Balance 1,109,866 844,992

(g) Reserve for investments

The reserve for investments is specifically made up of the portion corresponding to the Company’s own resources that will be used for the expansion of the water supply and sewage sanitation systems.

17. FINANCIAL INSTRUMENTS AND RISK

(a) Identification and valuation of the financial instruments

The Company operates with several financial instruments with emphasis in cash and cash equivalents, including financial investments and loans and financings, described as follows.

The Company did not perform transactions with derivatives in 2010 and 2009.

(i) Cash and cash equivalents, accounts receivable, other current assets and accounts payable

The amounts recorded approximate the realization amounts.

F-46 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

Cash equivalents correspond to the financial investments expressed in Reais and have immediate liquidity.

(ii) Loans and Financings

In accordance with accounting standards related to financial instruments, the table below presents the market values of the projected cash flows, at fair value, of loans and financings on September 30, 2010.

September 30, December 31, 2010 2009 Equity Market Equity Market amount value amount value Banking Loans Foreign Currency (iv) 1,715,685 2,083,049 1,749,798 2,446,340 Debentures (i) 2,718,772 3,418,037 1,320,200 1,584,513 BNDES (ii) 482,198 482,198 272,685 272,685 Others (iii) 2,740,947 3,033,184 3,217,317 3,509,352 7,657,602 9,016,468 6,560,000 7,812,890

In order to obtain the market values of Financial Instruments, the following criteria have been adopted:

(i) Debentures are financings considered by the nominal amount restated up to the maturity date, discounted to present value at the forward interest market rates, disclosed by Anbima in the secondary market, having September 30, 2010 as basis and the Company’s security traded in the domestic market.

(ii) Financings - BNDES, those are instruments considered by the nominal amount restated up to the maturity date, indexed by the TJLP, which is a specific term, not comparable to other market rate. Therefore, the Company chose presenting the amount recognized as of September 30, 2010as market value

(iii) Other financings in national currency are considered by the nominal amount restated up to the maturity date, discounted to present value at the forward interest market rates. The forward rates used were obtained at the BM&F website.

(iv) Foreign currency denominated financings are controlled in the original currency, converted at the foreign exchange rate at the date of the balance sheet, discounted to present value using the forward market rate obtained in the Bloomberg, based on the Company’

Additionally, the Company has an instrument indexed to the YEN [JICA (Note 10)], which, in addition of the premises above, was taken into account

F-47 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

in the conversion to present value the parity of the original currency of the instrument related to the dollar.

(b) Market risks

(i) Foreign exchange rate risk

This risk results from the likelyhood of the Company to incur in losses due to changes in foreign exchange rates that impact the loans and financings in foreign denominated currency and, consequently, the financial expenses. The Company does not maintain “hedge” or “swap” operations, however, the company performs an active management of the debt, seeking to reduce the exposure to foreign currency, taking advantage of the opportunities, to exchange expensive debts to cheaper debts, reducing the financing cost by means of anticipation of the maturity dates.

A significant portion of the Company’s financial debt was related to the US dollar and to the Yen, in the total amount of R$1,715,685 (Note 10). The table below summarizes the Company’s exposure to exchange rates at September 30, 2010.

US$ Japanese Yen Loans and financing 746,267 21,316,000

This risk arises from the possibility that the Company may incur losses due to interest rate fluctuations and indices that increase its interest expense on loans and financing. The Company has not entered into any derivative contract to hedge against this risk; however, it continually monitors market interest rates, in order to evaluate the need to replace its debt. As of September 30, 2010, the Company had R$2,659,925 in loans and financing which were obtained at variable interest rates (CDI and TJLP).

Another risk faced by the Company is the lack of correlation between the monetary adjustment indices of its debt and those of its receivables. Water supply and sewage treatment tariffs do not necessarily follow the increases in the interest rates affecting the Company’s debt.

(iii) Credit risk

Credit risk is mitigated by selling to a geographically dispersed customer base.

Following is presented the table demonstrating the sensitivity analysis of the financial instruments that may generate significant impacts to the Company.

F-48 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

Under the terms of CVM instruction 475/08, to demonstrate the amounts of the main financial liabilities converted at a projected rate for final settlement of each contract, converted to fair value (Scenario I) with 25% appreciation (Scenario II) and 50% appreciation (Scenario III).

September 30, 2010 Financial Instruments Risk Scenario I Scenario II Scenario III R$ R$ R$ Financial Liability Loans and Financings Banco do Brasil, CEF Increase 1,203,035 1,206,711 1,211,214 in UPR Debentures Increase 431,014 538,768 646,521 in IGPM Debentures Increase 147,298 184,123 220,947 in IPCA BID and Eurobonds Increase 863,418 1,079,272 1,295,126 in the US$ JICA Increase 132,346 165,433 198,519 in the Yen

The indexes used for each scenario are based on the number of days to elapse for each contract, the amounts expressed above were summarized.

The rates were projected based on the settlement dates of each financial instrument; the information was obtained out of BM&F website.

These sensitivity analysis have the purpose to measure the impact of the changes in the market variables on the Company’s financial instruments. Such amounts, when settled, may present values different from those demonstrated above, due to the estimates used in their preparation process.

18. OPERATING REVENUE Nine-month period ended September 30, September 30, 2010 2009

São Paulo’s Metropolitan Region 4,300,738 4,469,216 Regional systems (i) 1,465,860 802,879 Total 5,766,598 5,272,095

(i) Comprises municipalities operating in inland and coastal regions of the State of São Paulo.

F-49 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

19. OPERATING COSTS AND EXPENSES

Nine-month period ended

September 30, September 30, 2010 2009 Cost of sales and services Payroll and related charges (771,399) (913,905) General supplies (94,400) (100,657) Treatment supplies (98,720) (105,266) Outside services (438,946) (447,306) Electricity (390,779) (358,925) General expenses (109,433) (32,899) Depreciation and amortization (423,526) (468,408) (2,327,203) (2,427,366) Selling expenses Payroll and related charges (144,165) (161,327) General supplies (4,612) (5,735) Outside services (167,234) (144,426) Electricity (586) (536) General expenses (52,428) (47,189) Depreciation and amortization (3,789) (3,367) Allowance for doubtful accounts, net of recoveries [Note 4 (c(ii))] (257,911) (234,658) (630,725) (597,238) Administrative expenses: Payroll and related charges (114,284) (128,358) General supplies (3,962) (4,722) Outside services (105,057) (102,664) Electricity (917) (731) General expenses (113,079) (166,040) Depreciation and amortization (11,944) (12,881) Tax expenses (50,548) (43,454) (399,791) (458,850) Costs, and selling and administrative expenses: Payroll and related charges (1,029,848) (1,203,590) General supplies (102,974) (111,114) Treatment supplies (98,720) (105,266) Outside services (711,237) (694,396) Electricity (392,282) (360,192) General expenses (274,940) (246,128) Depreciation and amortization (439,259) (484,656) Tax expenses (50,548) (43,454) Allowance for doubtful accounts, net of recoveries - [Note 4 (c(ii))] (257,911) (234,658) (3,357,719) (3,483,454) Financial expenses:

F-50 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

Nine-month period ended

September 30, September 30, 2010 2009 Interest and charges on loans and financing - local currency (348,563) (296,102) Interest and charges on loans and financing - foreign currency (39,156) (49,927) Interest on Shareholders’ Equity - (138,980) Interest on Shareholders’ Equity (reversal) - 138,980 Other financial expenses (134,754) (69,868) Income tax on remittance abroad (2,295) (2,639) Monetary variation on loans and financing (64,275) 854 Other Monetary Variations (41,753) (20,134) Provisions for financial contingencies 14,071 (179,679) (616,725) (617,495)

Financial income: Monetary variation gains 90,954 42,010 Income from temporary cash investments 89,808 62,620 Interest and others 59,268 56,562 240,030 161,192

Financial expenses before exchange variations, net (376,695) (456,303)

Exchange variations, net Exchange variation on loans and financing 22,102 375,442 Other foreign exchange variations (178) (986) Exchange gains 154 (7,369) 22,078 367,087

Financial expenses, net (354,617) (89,216)

F-51 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

20. OTHER OPERATING INCOME AND EXPENSES

The break-down of “other operating income (expenses), net” is the following:

Nine-month period ended

September September 30, 2010 30, 2009 Other operating expenses 41,794 36,992 Cofins and Pasep (3,866) (3,422) 37,928 33,570 Other operating expenses (32,757) (18,736)

Other operating income (expenses), net 5,171 14,834

Other operating revenues include sales of fixed assets: sales of public notices, scraps, indemnifications and expense reimbursements, fines and pledges, lease of real estate, water of reuse, Pura´s projects and services, Aqualog and other technical services.

The other operating expenses comprise: (i) the write-off of items of fixed assets by obsolescence, discontinued projects, unproductive wells, economically unfeasible projects and loss with fixed assets (note 8) and (ii) provision referring to the actuarial obligation of State Law 4819/58 (note 5).

21. AGREEMENT WITH THE MUNICIPALITY OF SÃO PAULO

On November 14, 2007, the Company and the Municipality of Paulo (the Parties) entered into an Agreement to establish the conditions that ensure the stability in the provision of water supply and sewage services, and environmental utility services in the city of São Paulo, the main provisions of which are as follows:

1. The Parties made the commitment to take basic sanitation and environmental actions, complementary to the actions of the Municipality of São Paulo, by investing in the deployment and continuity of programs such as: “Programa Córrego Limpo” (Clean River Program) and “Programa de Uso Racional da Água - PURA” (Rational Water Use Program), the purpose of which is to ensure a decrease in water consumption by City government units, ensuring water supply to and the quality of living of the population;

2. Starting November 14, 2007, Agreement date, all the amounts paid by the Municipality of São Paulo to SABESP, referring to consumption by City departments, agencies, and foundations, net of taxes, will be used in basic sanitation and environmental actions in the Municipality;

3. The Municipality made the commitment to resume the payment of consumption bills issued by SABESP, starting November 14, 2007, the date of this Agreement’s execution;

F-52 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the nine-month period ended September 30, 2010 ( Amounts in thousands of Brazilian reais - R$, unless otherwise stated )

On June 23, 2010 the State of Sao Paulo, through its Governor, the Municipality of Sao Paulo and the Regulating Agency of Sanitation and Energy – ARSESP entered into the Agreement provided in the initial instrument, signed in November 14, 2007.

The Agreement, signed in June 23, 2010 has purpose of sharing the responsibility for offering the service of water supply and sanitation sewage service in the Sao Paulo city, in the next 30 years, extendable for an equal period. Additionally, it attributes to Sabesp exclusivity in the provision of services and defines ARSESP as responsible for regulating functions, including tariff, control and inspection of services.

Also on June 23, 2010 it was signed the “Provision of Public Services of Water Supply and Sanitation Sewage Agreement of”. The Agreement was entered into between the State Government of Sao Paulo, the Municipality of Sao Paulo and Sabesp, for the period of 30 years, extendable for an equal period, encompassing the following activities: i. the protection of manantials, in articulation with other bodies of the State and the Municipality; ii. capitation, adduction and treatment of gross water; iii. collection, transportation and final disposal of sanitation sewage; and iv. adoption of other actions of basic and environmental sanitation.

The municipal law 14934/09 authorized the municipal executive power to execute the abovementioned instruments with the signatories also mentioned above.

22. SUBSEQUENT EVENTS

-ProBillings

The Loan Agreement BZ-P17, signed on October 14, 2010 between SABESP – Companhia de Saneamento Basico do Estado de Sao Paulo and JICA – Japan International Cooperation Agency, for financing the Integrated Program of Environmental Improvement in the Area of Manantial of the Billings Reservoir. The total investment amounts to ¥ 12,357 billion (approximately R$251,712), of which, ¥ 6,208 billion (approximately R$126,457) from financing and ¥ 6,149 billion from Company´s resources (approximately R$125,255). The total period of contract is 25 years, with seven-year of grace period. Interests: 1.2% per year for civil projects and 0.01% per year for consulting services.

F-53 (A free translation of the original in Portuguese)

Report of Independent Auditors

To the Board of Directors and Stockholders Companhia de Saneamento Básico do Estado de São Paulo - SABESP

1 We have audited the accompanying balance sheets of Companhia de Saneamento Básico do Estado de São Paulo - SABESP ("the Company") and the consolidated balance sheets of Companhia de Saneamento Básico do Estado de São Paulo - SABESP and its subsidiary as of December 31, 2009 and 2008, and the related statements of income, of changes in stockholders' equity, of cash flows and of value added of the Company and the related consolidated statements of income, of cash flows and of value added for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements.

2 We conducted our audits in accordance with approved Brazilian auditing standards, which require that we perform the audit to obtain reasonable assurance about whether the financial statements are fairly presented in all material respects. Accordingly, our work included, among other procedures: (a) planning our audit taking into consideration the significance of balances, the volume of transactions and the accounting and internal control systems of the Company; (b) examining, on a test basis, evidence and records supporting the amounts and disclosures in the financial statements; and (c) assessing the accounting practices used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

3 In our opinion, the financial statements audited by us present fairly, in all material respects, the financial position of Companhia de Saneamento Básico do Estado de São Paulo - SABESP and of Companhia de Saneamento Básico do Estado de São Paulo - SABESP and its subsidiary at December 31, 2009 and 2008 and the results of its operations, the changes in stockholders' equity, its cash flows and the value added, and the consolidated results of operations, cash flows and value added for the years then ended, in accordance with accounting practices adopted in Brazil.

4 As mentioned in Note 5, the Company and the Government of the State of São Paulo entered into an agreement to settle the so-called "uncontroversial amount", referring to the reimbursement of payments related to retirement and pension plans paid by the

F-54 G:\PAR\SABES209.PAR.MOD Companhia de Saneamento Básico do Estado de São Paulo - SABESP

Company, in the name and on account of the Government of the State of São Paulo. The recovery of this asset may be influenced by: (a) the resolution of legal uncertainties caused by a public action and legislative authorization related to the transfer of reservoirs to the Company, amounting to R$ 696,283 thousand and (b) the financial collection of other amounts, amounting to R$ 226,868 thousand.

5 As mentioned in Note 25, certain agreements were signed between the Municipality of São Paulo and the Company in relation to the resolution of outstanding debts to ensure stability in the provision of services. In view of the current stage of the negotiations between the Company and the Municipality of São Paulo, management understands that no adjustment will be necessary to the corresponding amounts recorded in the financial statements. Therefore, no adjustment has been made in the financial statements.

6 The accounting practices adopted in Brazil differ, in certain significant aspects, from International Financial Reporting Standards. The nature and effect of these differences which affect the Company's shareholders' equity and net income is presented in Note 27 to the financial statements.

7 Without qualifying our opinion, we draw attention to the fact that Note 27 explains why there is a possibility that the reconciliation to IFRS may require adjustment before preparing its first IFRS financial statements and establishing its transition date as defined by IFRS 1. Moreover, we draw attention to the fact that under IFRSs only a complete set of financial statements comprising a balance sheet, statements of income, of comprehensive income, of changes in shareholders' equity, and of cash flows, together with comparative financial information and explanatory notes, can provide a fair presentation of the company's financial position, results of operations, and cash flows in accordance with IFRSs.

São Paulo, March 26, 2010, except for Note 27 as to which date is April 30, 2010

PricewaterhouseCoopers Auditores Independentes CRC 2SP000160/O-5

Paulo Cesar Estevão Netto Contador CRC 1RJ026365/O-8 "T" SP

F-55 G:\PAR\SABES209.PAR.MOD COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP BALANCE SHEETS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) Parent Company Consolidated Parent Company Consolidated

Note 2009 2008 2009 2008 Note 2009 2008 2009 2008 Assets Liabilities and shareholders' equity

Current assets Current liabilities Cash and cash equivalents 3 769,433 622,059 771,008 625,732 Contractors and suppliers 195,606 187,139 195,765 187,143 Trade accounts receivable 4 1,179,730 1,129,746 1,179,730 1,129,746 Loans and financing 10 1,010,537 1,448,860 1,010,537 1,448,860 Related-party balances 5 135,987 210,131 135,987 210,131 Payroll, accruals and Inventories 39,877 47,678 39,877 47,678 payroll charges 239,109 196,056 239,152 196,075 Recoverable taxes 3,017 4,665 3,017 4,665 Taxes payable 12 218,862 130,409 218,867 130,410 Other receivables 141,413 49,478 141,504 49,478 Deferred taxes 11 37,912 64,369 37,912 64,369 Deferred income tax and Interest on own capital payable 16 365,442 275,007 365,442 275,007 social contribution 11 258,551 170,982 258,551 170,982 Provisions for contingencies 15 643,863 459,395 643,863 459,395 Total current assets 2,528,008 2,234,739 2,529,674 2,238,412 Accounts payable 239,494 198,511 239,494 198,511 Other payables 158,864 57,149 158,864 57,149 Total current liabilities 3,109,689 3,016,895 3,109,896 3,016,919

Noncurrent liabilities Noncurrent assets Long-term payables: Long-term receivables: Loans and financing 10 5,549,463 5,416,248 5,549,463 5,416,248 Trade accounts receivable 4 266,543 326,472 266,543 326,472 Taxes payable 12 85,029 114,210 85,029 114,210 Related-party balances 5 956,648 980,756 956,648 980,756 Deferred taxes 11 156,860 141,492 156,860 141,492 Indemnities receivable 6 146,213 148,794 146,213 148,794 Provisions for contingencies 15 824,957 698,253 824,957 698,253 Judicial deposits 46,365 49,127 46,365 49,127 Actuarial liability - Law 4819/58 13 518,027 535,435 518,027 535,435 Other receivables 100,395 192,257 100,395 192,257 Pension plan obligations 13 480,103 419,871 480,103 419,871 Deferred income tax and Other payables 313,231 223,568 313,231 223,568 social contribution 11 530,131 435,341 530,131 435,341 Total noncurrent liabilities 7,927,670 7,549,077 7,927,670 7,549,077 2,046,295 2,132,747 2,046,295 2,132,747 Shareholders' equity 16 Investments 7 4,334 4,552 720 720 Capital 6,203,688 6,203,688 6,203,688 6,203,688 Property, plant and equipment 8 15,441,056 14,350,501 15,443,211 14,350,684 Capital reserve 124,255 124,255 124,255 124,255 Intangible assets 9 1,545,303 1,391,348 1,545,303 1,391,348 Revaluation reserve 2,145,100 2,253,012 2,145,100 2,253,012 16,990,693 15,746,401 16,989,234 15,742,752 Earnings reserves 20,545,94 966,960 2,054,594 966,960 Total noncurrent assets 19,036,988 17,879,148 190,355,29 17,875,499 Total shareholders' equity 10,527,637 9,547,915 10,527,637 9,547,915

TOTAL LIABILITIES AND SHAREHOLDERS' TOTAL ASSETS 21,564,996 20,113,887 21,565,203 20,113,911 21,564,996 20,113,887 21,565,203 20,113,911 EQUITY

The accompanying notes are an integral part of these financial statements

F-56 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP STATEMENTS OF INCOME For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated)

PARENT COMPANY CONSOLIDATED

Note 2009 2008 2009 2008

GROSS REVENUE FROM SALES AND SERVICES 19 7,236,218 6,838,803 7,236,218 6,838,803 Gross sales deductions (505,671) (487,131) (505,671) (487,131) NET REVENUE FROM SALES AND SERVICES 6,730,547 6,351,672 6,730,547 6,351,672

COST OF SALES AND SERVICES 20 (3,076,273) (2,831,809) (3,076,273) (2,831,809) GROSS PROFIT 3,654,274 3,519,863 3,654,274 3,519,863 OPERATING EXPENSES Selling 20 (801,259) (718,949) (801,259) (718,949) Administrative 20 (671,742) (578,458) (672,248) (578,596) Other operating expenses, net 21 (39,500) (1,052,984) (39,500) (1,052,984)

INCOME FROM OPERATIONS BEFORE EQUITY SHARE OF INVESTMENT IN INVESTEE, FINANCIAL INCOME (EXPENSES), AND TAXES 2,141,773 1,169,472 2,141,267 1,169,334 EQUITY SHARE OF INVESTMENT SUBSIDIARIES Equity share of investment in investee (218) (9) - - INCOME BEFORE FINANCIAL INCOME (EXPENSES), NET 2,141,555 1,169,463 2,141,267 1,169,334 Financial expenses, net 20 (598,995) (268,790) (598,707) (268,661) Exchange differences, net 20 395,369 (438,869) 395,369 (438,869)

INCOME BEFORE INCOME TAX AND SOCIAL CONTRIBUTION 1,937,929 461,804 1,937,929 461,804 INCOME TAX AND SOCIAL CONTRIBUTION Current 11(c) (748,705) (548,373) (748,705) (548,373) Deferred 11(c) 184,655 150,140 184,655 150,140

NET INCOME FOR THE YEAR 1,373,879 63,571 1,373,879 63,571

Earnings per share in R$ 16(b) 6.03 0.28 6.03 0.28 The accompanying notes are an integral part of these financial statements.

F-57 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated)

Earnings reserves Capital Revaluation Retained Note Capital reserve reserve Legal Investments earnings TOTAL BALANCES AS OF DECEMBER 31, 2007 3,403,688 124,255 2,339,829 306,654 3,609,580 (3,474) 9,780,532 Absorption of accumulated losses generated by - - - - (3,474) 3,474 - adjustments under Law 11638/07

Capitalization of reserves 2,800,000 - - - (2,800,000) - -

Realization of revaluation reserve 8(h) - - (86,817) - - 86,817 -

Net income for the year - - - - 63,571 63,571 - Transfer to legal reserve 16(e) - - - 3,178 - (3,178) - Interest on own capital (R$1.30 per share) 16(c) - - - - - (296,188) (296,188) Absorption of accumulated losses by transfer to 16(e(ii)) - - - - (148,978) 148,978 - investment reserve

BALANCES AS OF DECEMBER 31, 2008 6,203,688 124,255 2,253,012 309,832 657,128 - 9,547,915

Realization of revaluation reserve 8(h) - - (107,912) - - 107,912 - Net income for the year - - - - - 1,373,879 1,373,879 Transfer to legal reserve 16(e) - - - 68,694 - (68,694) - Interest on own capital (R$1.73 per share) 16(c) - - - - - (394,157) (394,157)

Transfer to reserve for investments 16(e(ii)) - - - - 1,018,940 (1,018,940) - BALANCES AS OF DECEMBER 31, 2009 6,203,688 124,255 2,145,100 378,526 1,676,068 - 10,527,637

The accompanying notes are an integral part of these financial statements

F-58 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP STATEMENTS OF CASH FLOWS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) Note PARENT COMPANY CONSOLIDATED

2009 2008 2009 2008

Cash flows from operating activities Income before income tax and social contribution 1,937,929 461,804 1,937,929 461,804 Adjustments to reconcile net income: Taxes and contributions payable 0 (68,878) 0 (68,878) Provision for contingencies 596,543 461,654 596,543 461,654 Actuarial liability - Law 4819/58 45,104 535,435 45,104 535,435 Allowance for losses on disputed amounts of Law 4819/58 0 409,079 0 409,079 Reversal of allowance for losses 8,183 (366) 8,183 (366) Other provisions 398 (492) 398 (492) Pension plan obligations 77,793 71,704 7,7793 71,704 Loss on disposal of property, plant and equipment 08(b) 22,852 157,978 22,852 157,978 Disposal of deferred charges 0 611 0 611 Other disposals 4,542 0 4,542 0 Gain on sale of property, plant and equipment (9,461) 0 (9,461) 0 Depreciation and amortization 20 560,686 617,804 560,689 617,804 Interest on loans and financing payable 456,203 499,590 456,203 499,590 Currency and exchange adjustments on loans and financing (402,329) 564,095 (402,329) 564,095 Currency adjustments from interest on own capital 0 7,338 0 7,338 Interest and currency adjustment losses 12 5,585 8,281 5,585 8,281 Interest and currency adjustment gains (28,724) (368,806) (28,724) (368,806) Allowance for doubtful accounts 20 308,188 336,264 308,188 336,264 Accrual for retirees ’ TAC 82,700 0 82,700 0 Accrual for São Paulo arrangement 27,748 0 27,748 0 Equity share of investment in investee 7 218 9 0 0 Adjusted net income 3,694,158 3,693,104 3,693,943 3,693,095 Changes in assets Trade accounts receivable (285,543) (301,844) (285,544) (301,844) Related-party balances 103,936 82,956 103,936 82,956 Indemnities receivable 2,581 0 2,581 0 Inventories 6,758 5,829 6,758 5,829 Recoverable taxes 1,648 4,749 1,648 4,749 Other receivables (4,903) (112,111) (4,994) (112,111) Judicial deposits (34,010) (37,933) (34,010) (37,933)

Changes in liabilities Contractors and suppliers (15,404) (917,986) (15,249) (17,982) Payroll, accruals and payroll charges (39,647) 29,259 (39,620) 29,275 Reserves for actuarial liability - Law 4819/58 (62,512) 0 (62,512) 0 Taxes payable (60,022) 431,346 (60,021) 431,350 Accounts payable 30,706 6,216 307,06 6,216 Other payables 181,058 16,321 181,058 16,321 Contingencies (240,031) (235,573) (240,031) (235,573) Pension fund - transfer to Sabesprev (17,561) (17,067) (17,561) (17,067) Changes in assets and liabilities (432,946) (145,838) (432,855) (145,814)

Cash provided by operating activities 3,261,212 3,547,266 3,261,088 3,547,281 Interest paid (555,573) (516,887) (555,573) (516,887) Income tax and social contribution paid (643,788) (502,404) (643,788) (502,404)

Net cash provided by operating activities 2,061,851 2,527,975 2,061,727 2,527,990

Cash flows from investing activities Purchase of property, plant and equipment (1,924,479) (1,395,458) (1,926,453) (1,395,641) Increase in intangible assets (56,014) (159,514) (56,014) (159,514) Increase in investments 0(3,841)0 0 Proceeds from sale of property, plant and equipment 29,162 0 29,162 0

Net cash used in investing activities (1,951,331) (1,558,813) (1,953,305) (1,555,155)

Cash flows from financing activities

Loans and financing Borrowings 2,237,056 1,043,174 2,237,056 1,043,174 Repayments of borrowings (1,896,480) (11,464,16) (1,896,480) (1,146,416)

Payment of interest on own capital (303,722) (708,858) (303,722) (708,858)

Net cash provided by (used in) financing activities 36,854 (812,100) 36,854 (812,100)

Increase in cash and cash equivalents 147,374 157,062 145,276 160,735

Cash and cash equivalents at beginning of year 3 622,059 464,997 625,732 464,997 Cash and cash equivalents at end of year 3 769,433 622,059 771,008 625,732

Changes in cash and cash equivalents 147,374 157,062 145,276 160,735

Supplemental information on cash flows: Capitalization of interest and finance charges 08(c) (143,985) 219,430 (143,985) 219,430 COFINS and PASEP paid 503,296 515,659 503,296 515,659 Program contract commitments (7,550) 146,426 (7,550) 146,426

The accompanying notes are an integral part of these financial statements

F-59 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP STATEMENTS OF VALUE ADDED For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) PARENT COMPANY CONSOLIDATED Note 2009 2008 2009 2008 Revenues Sales of products and services 19 7,236,218 6,838,803 7,236,218 6,838,803 Other income 21 55,689 70,280 55,689 70,280 Income related to construction of own assets 12,719 356,600 12,719 356,600 Allowance for doubtful accounts – charge 20 (308,188) (336,264) (308,188) (336,264) 6,996,438 6,929,419 6,996,438 6,929,419 Inputs purchased from third parties Cost of sales and services (1,325,027) (1,180,116) (1,325,027) (1,180,116) Materials, electricity, outsourced services, and other (742,502) (589,851) (742,709) (589,925) Other operating expenses 21 (90,913) (1,117,958) (90,913) (1,117,958) (2,158,442) (2,887,925) (2,158,649) (2,887,999) Gross value added 4,837,996 4,041,494 4,837,789 4,041,420 Retentions Depreciation & amortization (including amounts capitalized) (562,337) (618,924) (562,340) (618,924) Wealth created by the Company 4,275,659 3,422,570 4,275,449 3,422,496 Wealth transferred to SABESP Equity in subsidiaries (218) (9) - - Financial income 20 219,192 567,898 219,485 568,027 218,974 567,889 219,485 568,027 Wealth for distribution 4,494,633 3,990,459 4,494,934 3,990,523 Distribution of wealth Employees Salaries and wages 918,514 20.4% 884,736 22.2% 918,716 20.4% 884,775 22.2% Benefits 308,662 6.9% 295,929 7.4% 308,672 6.9% 295,931 7.4% Severance Indemnity Fund for Employees (FGTS) 201,903 4.5% 66,741 1.7% 201,918 4.5% 66,741 1.7% 1,429,079 31.8% 1,247,406 31.3% 1,429,306 31.8% 1,247,447 31.3% Taxes, fees and contributions Federal 1,334,676 29.7% 1,124,752 28.2% 1,334,719 29.7% 1,124,770 28.2% State 36,621 0.8% 32,713 0.8% 36,621 0.8% 32,713 0.8% Municipal 18,896 0.4% 14,490 0.4% 18,897 0.4% 14,491 0.4% 1,390,193 30.9% 1,171,955 29.4% 1,390,237 30.9% 1,171,974 29.4% Lenders and lessors Interest, exchange and currency adjustments 275,282 6.1% 1,489,967 37.3% 275,287 6.1% 1,489,968 37.3% Rentals 26,200 0.6% 17,560 0.4% 26,225 0.6% 17,563 0.4% 301,482 6.7% 1,507,527 37.7% 301,512 6.7% 1,507,531 37.7% Shareholders Interest on own capital 16(c) 394,157 8.8% 63,571 1.6% 394,157 8.8% 63,571 1.6% Retained earnings 979,722 21.8% ______- 0.0% 979,722 21.8% ______- 0.0% 1,373,879 30.6% ___ 63,571 1.6% 1,373,879 30.6% ___ 63,571 1.6% Wealth distributed 4,494,633 100% 3,990,459 100% 4,494,934 100% 3,990,523 100% The accompanying notes are an integral part of these financial statements

F-60 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) 1. OPERATIONS

Companhia de Saneamento Básico do Estado de São Paulo (“SABESP” or the “Company”) is a mixed- capital company headquartered in São Paulo, controlled by the São Paulo State Government. The Company is engaged in the provision of basic and environmental sanitation services, and supplies treated water on a bulk basis and provides sewage treatment services to other six municipalities of the Greater São Paulo Metropolitan Area.

In addition to providing basic sanitation services in the State of São Paulo, SABESP may perform these activities in other states and countries, and can operate in drainage, urban cleaning, solid waste handling and energy markets. The objective set in the new vision of SABESP is to be recognized as the company that ensured universal access to water and sewage services in its marketplace, focused on the customer, and in a sustainable and competitive manner, with excellence in environmental solutions.

The company operates water and sewage services in 366 municipalities of the State of São Paulo, having temporarily discontinued operations in two of these municipalities due to court orders under ongoing lawsuits. In most of these municipalities operations are based on 30-year concession agreements. As of December 31, 2009, 82 concessions have expired and are being renegotiated. From 2010 to 2030, 80 concessions will expire, and the remaining concessions have an indefinite term. By December 31, 2009, 174 program contracts had been signed (2008 – 160 program contracts).

Management believes that all concessions terminated and not yet renewed will result in new contracts or contract extensions, and does not consider the risk of discontinuity in the provision of municipal water and sewage services. As of December 31, 2009, the carrying amount of property, plant and equipment used in the 82 municipalities under negotiation totals R$2,049 million and revenue for the year then ended totals R$876 million.

In the municipality of Santos, in the coastal region, which has a significant population, the Company operates under an authorization public deed, a situation similar to other municipalities in that region and in the Ribeira valley, where the Company started to operate after the merger of the companies that formed it.

The significant transformations in the water and sewage industry regulatory framework in 2007 generated new challenges and opportunities for SABESP. The O regulatory framework that consolidated the integration between utilities’ investments and the priorities set out by the Grantor municipalities rendered reporting more efficient and transparent, increasing security for investments.

The Company’s shares have been listed on the Novo Mercado (New Market) segment of BOVESPA (São Paulo Stock Exchange) since April 2002 and on the New York Stock Exchange (NYSE) as ADRs since May 2002.

The information on the concession area, number of municipalities, water and sewage volumes, and other related data disclosed in this report that are not derived from the financial statements is not audited by the independent auditors.

2. PRESENTATION OF FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING PRACTICES

2.1 Presentation of Financial Statements

The financial statements were approved by the Board of Directors on March 25, 2010.

The financial statements have been prepared and are presented in accordance with Brazilian accounting practices, based on the provisions of Brazilian Corporate Law and the standards set out by the Brazilian Securities and Exchange Commission (CVM).

The main accounting policies adopted in preparing these financial statements comply with the standards and guidance effective for financial statements closed as of December 31, 2009, which are consistent with the standards and guidance adopted for the close of fiscal year 2008, and are different from the standards and guidance that will be used to prepare the financial statements for the year ending December 31, 2010, as described in item 2.3 below.

The preparation of financial statements requires management to make estimates and assumptions to account for certain assets, liabilities and other transactions, as well as the amounts of revenue and expenses related to the rendering of services. Therefore, the Company’s financial statements include estimates of the useful lives of property, plant and equipment, reserves for contingent liabilities, determination of the provisions for income tax, and oter similar provisions. Actual results could differ from those estimates.

F-61 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) 2.2 Significant Accounting Practices

(a) Revenue from sales and services

Revenue from water supply and sewage collection are recognized as the water is consumed and services are provided. Revenues from unbilled water supply and sewage services are recorded as trade accounts receivable based on monthly estimates, so as to match revenues and expenses in the proper period.

(b) Leases

Leases of property, plant and equipment where the Company as lessor retains substantially all risks and rewards incidental to ownership are classified as finance leases. Such leases are accounted for as purchase financing, and a fixed asset and a financing liability are recognized at their inception. Property, plant and equipment purchased under finance leases are depreciated at the rates set out in note 8.

Income tax and social contribution are calculated based on taxable income. The rates used are 15%, plus a 10% surtax for income tax and 9% for social contribution tax and the taxes are accounted for on the accrual basis. Deferred income tax and social contribution assets are recognized to the extent that it is probable that there will be taxable income available for the offset of temporary differences and/or tax loss carryforwards, based in future taxable income projections prepared and based on internal assumption and future economic scenarios, which are therefore subject to change. The Company elected not to recognize deferred income tax and social contribution on the revaluation reserve of property, plant and equipment recorded through 1991.

(d) Other income and expenses

Other income and expenses are recorded on the accrual basis.

(e) Cash and cash equivalents

Consist of cash and highly liquid short-term investments, immediately convertible into cash and with insignificant risk of change in value.

(f) Financial instruments

Classification and measurement

The Company classifies its financial assets according to the following categories: measured at fair value through profit or loss, receivables, and held-to-maturity and available-for-sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of the financial assets when first recorded.

Financial assets calculated at fair value through profit or loss

These are financial assets held for active and frequent trading. These assets are classified as current assets. Gains or losses arising from changes in the fair value of financial assets measured at fair value through profit or loss are presented in the statement of income in ‘Financial income (expenses)’ in the period they occur, unless the instrument has been contracted in connection to another transaction. In this case, changes are recognized in the same line item of income affected by this transaction.

Loans and receivables

These comprise receivables which are nonderivative financial assets with fixed or determinable payments, not quoted in an active market. Loans and receivables are included in current assets, except for those with maturity of more than 12 months after the balance sheet date (these are classified as noncurrent assets). The Company's loans and receivables comprise trade accounts receivable, other accounts receivable and cash and cash equivalents. Loans and receivables are recorded at amortized cost, under the effective interest rate method.

Held-to-maturity assets

These are basically the financial assets that cannot be classified as loans and receivables because they are quoted in an active market. In this case, these financial assets are acquired with the intention and financial capacity for their maintenance in the portfolio up to maturity. These are stated at cost of purchase, when F-62 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) applicable, as income for the year, under the effective interest rate method. As of December 31, 2009 and 2008, the Company did not have financial assets classified in this category.

Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are included in this category or that are not classified in any other category. They are included in noncurrent assets, unless management intends to sell the investment within 12 months after the balance sheet date. Available-for-sale financial assets are recorded at fair value. Interest on available-for-sale securities, calculated under the effective interest rate method, is recognized in the statements of income as financial income. The portion related to the change in fair value is recorded against shareholders’ equity, in the equity valuation adjustments account, and it is realized against income (loss) upon its settlement or due to impairment. As of December 31, 2009 and 2008, the Company did not have financial assets classified in this category.

Fair value

Fair values of investments quoted in a public market are based on current purchase prices. For financial assets without an active market or public quotation, the Company determines fair value using valuation techniques, which consist of the use of recent transactions with third parties, the reference to other substantially similar instruments, the analysis of discounted cash flows and option pricing models, which make the makes maximum use of market inputs and relies as little as possible on entity-specific inputs.

The Company measures, at the balance sheet date, if there is objective evidence that a financial asset or a group of financial assets is impaired. When there is such evidence for available-for-sale financial assets, the cumulative loss – measured as the difference between the cost of purchase and current fair value minus any impairment loss on this financial asset previously recognized in profit or loss - is transferred from equity to the statement of income.

(g) Trade accounts receivable and allowance for doubtful accounts

Trade accounts receivable, except for agreements on refinanced amounts, do not take into consideration financial charges, monetary restatement or fines. The allowance for doubtful accounts is recorded in an amount considered sufficient by management to cover probable losses on the realization of receivables and management does not expect to incur in additional losses on such accounts receivable, especially from municipal governments. The allowance is set up on bills from R$5 to R$30, past due for more than 360 days. Bills exceeding R$30 past due for more than 360 days and in the process of judicial collection are also provided against. The amount thus determined is adjusted when it is excessive or insufficient, based on the analyses of the history of receipts, taking into consideration the expectation of recovery in the different categories of customers. Amounts up to R$5 and past due for more than 180 days are written off against income.

(h) Inventories

Inventories of supplies for consumption and maintenance of the water and sewage systems are stated at the lower of average cost of acquisition or realizable value, and are classified in current assets. Inventories for investments are classified in property, plant and equipment and recorded at average cost of acquisition.

(i) Investments

Investments in Sesamm are recorded and evaluated based on the equity accounting method, recognized in income for the year as operating income (or expenses). For the purposes of calculating the equity share of in earnings of the subsidiary, unrealized gains or transactions between the Company and its investee are eliminated in proportion to the Company’s investment; unrealized losses are also eliminated, unless the transaction presents evidence of impairment of the transferred asset.

The accounting policies applied by Sesamm are consistent with the accounting policies adopted by the Company.

(j) Foreign currency translation

F-63 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) Foreign currency-denominated transactions are translated into Brazilian reais using the exchange rates prevailing at the transaction dates. Balance sheet accounts are translated at the exchange rate prevailing at balance sheet date. Exchange gains and losses arising on the settlement of these transactions and the translation of foreign currency-denominated cash assets and liabilities are recognized in the statement of income.

(k) Property, plant and equipment

Stated at cost, monetarily adjusted through December 31, 1995, combined with the following:

Depreciation is calculated using the straight-line method, at the annual rates mentioned in note 8.

The Company’s management opted to maintain the revaluation reserve until its actual realization.

The revaluation of property, plant and equipment items, carried out in two stages in 1990 and 1991, was based on an appraisal report issued by independent appraisers and is recorded as a contra-entry to the Revaluation Reserve in Shareholders’ Equity, realized through depreciation, sale, and disposal of the respective assets, as a credit to ‘Retained earnings’. Therefore, the Company adopted the restated residual amount as of December 31, 2008 as the new cost of property, plant and equipment.

Borrowing costs of loans and financing for construction in progress are allocated to the costs of the assets.

Donations of property, plant and equipment received from third parties and government entities to enable the Company to provide water supply and sewage services are recorded in property, plant and equipment as a contra entry to revenue.

Construction in progress projects are recorded at cost and are mainly related to construction projects contracted with third parties.

Improvements made in the existing assets are capitalized and the expenses on maintenance and repairs are recorded in income and expensed when incurred. Materials allocated to specific projects are added to construction in progress.

(l) Intangible assets

From 1999 to 2006, the acquisition of concession rights from third parties has been accounted for at the amount determined in economic and business valuation reports issued by independent experts. The renewals arising from the new regulatory framework were carried out based on program contracts. Upon renewal of certain program contracts, the Company assumed commitments to financially participate in social and environmental sanitation actions. These commitments are recorded in intangible assets and are amortized over the program contract term, which is mostly 30 years.

(m) Loans and financing

Borrowings are initially recognized at fair value, upon receipt of funds, net of transaction costs. Subsequently, borrowings are stated at amortized cost, i.e., plus charges and interest prorated to the period incurred.

Nonconvertible debentures are recognized in a similar manner to borrowings.

(n) Payroll and related charges

Salaries include an accrual for vacations and the 13th salary and additional payments negotiated in collective labor agreements plus related charges and are recorded on the accruals basis.

(o) Profit sharing

The accrual for profit sharing is recorded on the accruals basis as operating expenses.

(p) Reserves for contingencies and judicial deposits

These are restated through the balance sheet dates using the probable amount of losses, determined based on their nature and the opinion of the Company’s legal advisors. For financial statement presentation purposes, the reserve for contingencies and judicial deposits are stated net of the related judicial deposits. F-64 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) The bases and the nature of the reserves for civil, tax, labor and environmental risks are described in note 15.

Judicial deposits not linked to related liabilities are recorded in noncurrent assets and monetarily restated.

(q) Environmental costs

Costs related to ongoing environmental programs are expensed as incurred. Ongoing programs are designed to minimize the environmental impact of the operations and to manage the environmental risks inherent to the Company’s activities.

(r) Pension plan

Liabilities from defined benefit pension plan correspond to the present value of the defined benefit obligation at balance sheet date, less the fair value of the plan’s assets, adjusted by actuarial gains or losses, and past service costs. The defined benefit obligation is calculated on annual basis by independent actuaries, using the projected unit credit method. The estimated future cash outflows is discounted to its present value, using the interest rates of Government bonds with maturities that approximate the maturity of the related liability. Actuarial gains and losses arising from changes in actuarial assumptions and amendments to pension plans are expenses or credited to income based on the average remaining length of service of the related employees.

(s) Interest on own capital

The Company uses the tax benefits of distributing dividends as interest on own capital, as permitted by Law. This interest is accounted for in accordance with Law 9249/95 for tax deductibility purposes, limited to the daily pro rata fluctuation of the Long-term Interest Rate (TJLP). The benefit attributable to shareholders is recognized in shareholders' equity.

(t) Present value

Long-term assets and liabilities, when applicable, are discounted to present value using discount rates that reflect our best estimate.

(u) Recovery of assets

Property, plant and equipment and other noncurrent assets, are reviewed to identify evidence of impairment annually, and also whenever events or alterations in the circumstances indicate that the carrying amount may not be recoverable. In this case, the recoverable value is calculated to check if there is any impairment. Impairment losses are recognized for the amount by which the carrying amount of an asset exceeds its recoverable value, which is the higher of net sales price and the value in use of an asset. For measurement purposes, assets are grouped in the lowest level for which there are separately identifiable cash flows.

2.3 Standards and interpretations not yet in effect

The standards and interpretations listed below have been issued and effective for annual reporting periods starting on of after January 1, 2010. In addition, other standards and interpretations were issued that change the accounting policies generally accepted in Brazil, as part of the convergence with international accounting standards. The standards below are those that can (or should) materially impact our financial statements. Under the new standards, the 2009 figures presented herein should be restated for comparative purposes on the presentation of the financial statements for the year ended December 31, 2010. The Company did not elect the early adoption of these standards for the year ended December 31, 2009.

(a) Standards

CPC 16 Inventories, approved by CVM Resolution 575, of June 5, 2009. Determination of cost of maintenance inventories, subsequent recognition as an expense, including any write-down to net realizable value.

CPC 20 Borrowing Costs, approved by CVM Resolution 577, of June 5, 2009. Treatment of borrowing costs and possibility of including them in assets when attributable to the acquisition, construction or production of a qualifying asset. F-65 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated)

CPC 22 Operating Segments, approved by CVM Resolution 582, of July 31, 2009. Prescribes the need to disclose information by operating segment of the Company.

CPC 25 Provisions, Contingent Liabilities and Contingent Assets, approved by CVM Resolution 594, of September 15, 2009. Ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to enable users to understand their nature, timing and amount.

CPC 26 Presentation of Financial Statements, approved by CVM Resolution 595, of September 15, 2009. Prescribes the basis for presentation of financial statements by setting out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content.

CPC 27 Property, Plant and Equipment, approved by CVM Resolution 619, of December 22, 2009. Prescribes the accounting treatment for property, plant and equipment as regards their recognition, measurement, depreciation, and impairment losses.

CPC 30 Revenue, approved by CVM Resolution 597, of September 15, 2009. Prescribes the accounting treatment of revenue arising from certain types of transactions and events.

CPC 32 Income Taxes, approved by CVM Resolution 599, of September 15, 2009. Prescribes the accounting treatment for income taxes.

CPC 33 Employee Benefits, approved by CVM Resolution 600, of October 7, 2009. Prescribes the accounting and disclosure for employee benefits.

CPC 36 Consolidated Financial Statement, approved by CVM Resolution 608, of November 26, 2009. Prescribes the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent.

CPC 37 First-time Adoption of International Financial Reporting Standards, approved by CVM Resolution 609, of December 22, 2009. Ensure the first financial statements of an entity prepared under International Financial Reporting Standards issued by the International Accounting Standards Board (IASB), hereinafter referred to as IFRSs, and its interim financial reports for part of the period covered by those financial statements, contain high quality information.

CPC 38 Financial Instruments: Recognition and Measurement, approved by CVM Resolution 604, of November 19, 2009. Establishes principles for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell nonfinancial items.

CPC 39 Financial Instruments: Presentation, approved by CVM Resolution 604, of November 19, 2009. Establishes principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities.

CPC 40 Financial Instruments: Disclosures, approved by CVM Resolution 604, of November 19, 2009. Requires disclosure of: (a) the significance of financial instruments for an entity’s financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the end of the reporting period, and how the entity manages those risks.

(b) Interpretations

ICPC 01 Service Concession Arrangements, approved by CVM Resolution 611, of December 22, 2009.

ICPC 08 Accounting for Proposed Dividends, approved by CVM Resolution 601, of October 7, 2009.

ICPC 09 Individual, Separate and Consolidated Financial Statements, and Application of the Equity Method of Accounting, approved by CVM Resolution 618, of December 22, 2009.

F-66 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) ICPC 10 Clarifications of CPC 27 and CPC 28, approved by CVM Resolution 619, of December 22, 2009.

ICPC 11 Transfers of Assets from Customers, approved by CVM Resolution 620, of December 22, 2009.

The Company is assessing the potential impacts arising from these pronouncements, interpretations and guidance, which can have a material impact of financial statements for the year ended December 31, 2009 to be presented comparatively with the financial statements for the year ending December 31, 2010, and the following annual reporting periods.

3. CASH AND CASH EQUIVALENTS

PARENT COMPANY CONSOLIDATED 2009 ___2008 2009 2008 Cash and banks 98,309 77,993 98,368 81,638 Cash equivalents 671,124 544,066 672,640 544,094 769,433 622,059 771,008 625,732

4. TRADE ACCOUNTS RECEIVABLE

(a) Balance sheet balances

PARENT COMPANY AND CONSOLIDATED

___2009 ___2008 Private sector: General and special customers (i) (ii) 776,040 736,000 Agreements (iii) 261,139 273,586 1,037,179 1,009,586 Government entities: Municipal 569,655 521,729 Federal 2,871 28,252 Agreements (iii) 143,575 145,767 716,101 695,748 Bulk sales – Municipal governments: (iv) Guarulhos 411,774 400,210 Mauá 190,153 163,015 Mogi das Cruzes 14,188 16,495 Santo André 428,227 375,345 São Caetano do Sul 3,410 3,363 Diadema 134,992 115,940 Total bulk sales – Municipal governments 1,182,744 1,074,368

Unbilled supply 364,480 309,805 Subtotal 3,300,504 3,089,507 Allowance for doubtful accounts (1,854,231) (1,633,289)

Total 1,446,273 1,456,218

Current 1,179,730 1,129,746 Noncurrent (v) 266,543 326,472

(i) General customers – residential and small and mid-sized companies.

(ii) Special customers – large consumers, commercial, industries, condominiums and special billing consumers (industrial waste, wells, etc.).

(iii) Agreements – installment payments of past-due receivables, plus monetary restatement and interest.

F-67 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) (iv) Bulk Sales - municipal governments – This balance refers to the sale of treated water to municipalities, which are responsible for distributing to, billing and charging final consumers. Some of these municipalities are questioning in court the tariffs charged by SABESP and do not pay for the amounts in dispute. The amounts past due, which are substantially included in the allowance for doubtful accounts, are classified in long-term receivables pursuant to the changes below:

PARENT COMPANY AND CONSOLIDATED

2009 2008

Balance at beginning of year 1,074,368 961,184 Revenue for services provided 332,975 314,288 Receipts – services in the current year (164,266) (135,347) Receipts – services in previous years (60,333) (65,757) Balance at end of year 1,182,744 1,074,368 Current 68,898 51,384 Noncurrent 1,113,846 1,022,984

(v) The noncurrent portion consists of trade accounts receivable that are past due and renegotiated with customers and amounts past due related to bulk sales to municipal governments and is recorded in the allowance for doubtful accounts.

(b) The aging of trade accounts receivable is as follows

PARENT COMPANY AND CONSOLIDATED

2009 2008 Current 1,002,506 949,209 Past-due: Up to 30 days 160,979 131,542 From 31 to 60 days 68,247 73,370 From 61 to 90 days 47,349 46,708 From 91 to 120 days 51,887 38,413 From 121 to 180 days 56,845 66,267 From 181 to 360 days 112,472 128,033 Over 360 days 1,800,219 1,655,965 Total 3,300,504 3,089,507

(i) Changes in the allowance during the year were as follows:

PARENT COMPANY AND CONSOLIDATED 2009 2008 Previous balance 1,633,289 1,314,671

Private sector/government entities 30,105 99,370 Bulk sales 190,837 219,248

Additions for the year 220,942 318,618 Balance 1,854,231 1,633,289

Current 852,420 778,238 Noncurrent 1,001,811 855,051

(ii) In income

The Company accounted for probable losses on accounts receivable in 2009 totaling R$295,799, of which R$74,857 (net of recoveries) were written off from accounts receivable (in 2008 – R$17,646), under ‘Selling expenses’. In 2008, these losses amounted to R$336,264.

F-68 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) 5. RELATED-PARTY BALANCES AND TRANSACTIONS

The Company is a party to transactions with its controlling shareholder, the São Paulo State Government, and companies related to it.

(a) Accounts receivable, interest on own capital and operating revenue with the São Paulo State Government

PARENT COMPANY AND CONSOLIDATED 2009 2008 Accounts receivable Current: Water and sewage services (i) 82,278 113,642 Gesp Agreement (iii), (iv) and (v) 26,181 28,256 Allowance for losses (v) (12,389) - Reimbursement of additional retirement and pension benefits – Agreement (ii) and (vi) 25,494 23,050 Reimbursement of additional retirement and pension benefits paid - Monthly flow (ii) and (vi) 14,423 45,183 Total current 135,987 210,131 Long term: Water and sewage services - Gesp Agreement (iii) (iv) and (v) 73,414 92,396 Reimbursement of additional retirement and pension benefits paid – Controversial (ii) and (vi) 471,591 409,079 Allowance for losses – Controversial (vii) (471,591) (409,079)

Reimbursement of additional retirement and pension benefits – Agreement (ii) and (vi) 186,951 192,077 Reimbursement of additional retirement and pension benefits – Reservoir (ii) and (vi) 696,283 696,283 Total noncurrent 956,648 980,756 Total receivables from shareholder 1,092,635 1,190,887

Provision of water and sewage services 169,484 234,294 Reimbursement of additional retirement and pension benefits 923,151 956,593 1,092,635 1,190,887

Interest on own capital payable 198,099 148,861

Gross revenue from sales and services Water sales 193,771 186,286 Sewage services 164,532 157,349 Receipts (349,983) (281,823)

Financial income 73,927 62,179

(i) Water and sewage services

The Company provides water supply and sewage collection services to the State Government and other companies related to it in accordance with usual market terms and conditions, except for the settlement of receivables, which may be realized in the conditions mentioned in items (iii), (iv) and (v).

(ii) Reimbursement of additional retirement and pension benefits paid

Refers to amounts of supplementary retirement and pension benefits provided for in State Law 4819/58 (“Benefits”) paid by the Company to former employees and their survivors.

Under the Agreement referred to in (iii), Gesp recognizes its liability from charges arising from the Benefits, provided that the payment criteria set forth by the State Department of Personnel (DDPE), based on legal

F-69 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) guidance of the Legal Consultancy of the Department of Finance and of the State Attorney General’s Office (PGE), are followed.

As presented in item (vi), some differences associated with the criteria used by the Company for the calculation and eligibility of the benefits were found during the validation performed by Gesp of the amounts due to the Company related to the benefits.

As of December 31, 2009 and 2008, 2,597 and 2,604 retired employees, respectively, received additional retirement benefits, and for the years ended December 31, 2009 and 2008, the Company paid R$116,082 and R$110,763, respectively. There were 91 active employees as of December 31, 2009 who will be entitled to these benefits as a result to their retirement as compared with 143 as of December 31, 2008.

In January 2004, the payments that supplement retirement and pension benefits were transferred to the Department of Finance and would be made in accordance with the calculation criteria determined by the PGE. As a result of a court decision, the liability for the payments returned to SABESP, as originally established.

(iii) Gesp Agreement

On December 11, 2001, the Company, the São Paulo State Government (through the State Department of Finance Affairs, currently Department of Finance) and the Water and Electricity Department (DAEE), with the intermediation of the State Department of Sanitation and Energy (former Department of Water Resources, Sanitation and Construction Works), entered into the Obligations, Payment Commitment and Other Covenants Acknowledgement and Consolidation Agreement (“Gesp Agreement”) for the settlement of outstanding debts between Gesp and the Company related to the provision of water supply and sewage services and to the Benefits.

The total agreement amounted to R$678,830, at historical amounts, R$320,623 of which refers to additional retirement and pension benefits in the period from March 1986 to November 2001, and (ii) R$358,207 arising from the provision of water supply and sewage collection services, billed and past due since 1985 until December 1, 2001, but not paid by Gesp.

In view of the strategic importance of the Taiaçupeba, Jundiaí, Biritiba, Paraitinga and Ponte Nova reservoirs for ensuring and maintaining the Upper Tietê water volume, the Company agreed to receive them as partial repayment of the reimbursement related to the Benefits. The DAEE would transfer the Reservoirs to the Company, replacing the amount owed by Gesp.

However, the São Paulo State Public Prosecution Office challenged the legal validity of this agreement, and its main argument is the absence of a specific legislative authorization for disposal of DAEE’s assets. The Company’s legal advisors assess the risk of loss in this lawsuit as probable, if the legislative authorization is not obtained, thus would hinder the transfer of the related reservoirs as a partial settlement of the balance receivable.

The balances of water supply and sewage collection services were included in the First and Second Amendments as described in items (iv) and (v) below. The balances related to the reimbursement of additional retirement and pension benefits were included in the Commitment Agreement between São Paulo State and SABESP, as described in items (vi) and (vii) below.

(iv) First Amendment to the Gesp Agreement

On March 22, 2004, the Company and the State Government amended the terms of the original Gesp Agreement, (1) consolidating and recognizing the amounts due by the State Government for water supply and sewage collection services provided, monetarily adjusted through February 2004; (2) formally authorizing the offset of amounts due by the State Government with interest on capital declared by the Company and any other debit existing with the State Government as of December 31, 2003, monetarily adjusted until February 2004; and (3) defining the payment conditions of the remaining liabilities of the State Government for the receipt of the water supply and sewage collection services.

Pursuant to the Amendment, the State Government recognized the amounts due to the Company for services water supply and sewage collection services provided until February 2004 totaling R$581,779, including monetary restatement based on the Benchmark Interest Rate (TR) at the end of each year until February 2004. The Company recognized amounts payable to the State Government related to interest on own capital totaling R$518,732, including (1) amounts declared and paid related to years prior to 2003 (R$126,967), (2) monetary restatement of these amounts based on the annual fluctuation of the

F-70 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) Consumer Price Index (IPC/Fipe) until February 2004 (R$31,098); and (3) amounts declared and due related to 2003 (R$360,667).

The remaining liability was to be paid in monthly installments from May 2005 to April 2009, monetarily restated by the Extended Consumer Price Index (IPCA/IBGE), plus monthly interest of 0.5%.

The Amendment to the Gesp Agreement does not provide for amounts due by the State Government related to the additional retirement and pension plan benefits paid on behalf of the State Government by the Company, which are still subject to the terms of the original Gesp Agreement.

(v) Second Amendment to the Gesp Agreement

On December 28, 2007, the Company and the State Government, by means of the Department of Finance, signed the second amendment to the terms of the original Gesp Agreement, (1) agreeing upon the payment in installments of the remaining balance of the First Amendment, amounting to R$133,709 (on November 30, 2007), to be paid in 60 monthly and consecutive installments of the same amount, the first of which fell due on January 2, 2008. The amount of the installments will be monetarily restated according to the fluctuation of the IPCA-IBGE, plus interest of 0.5% per month. The balance of this agreement, the installments of which have been paid monthly, includes the amount of R$46,244, which the State does not recognize as due. SABESP’s understanding differs from that of the State regarding this amount and does admit the review of these previously agreed-upon amounts without the supported and unequivocal demonstration of the lack of related support between the amounts presented by SABESP and the services effectively provided. (2) as regards past-due and unpaid accounts in the period March 2004 to October 2007, arising from the provision of water and sewage services totaling R$256,608, of which we received R$236,126 and R$8,093 were transferred to another debtor, and R$12,389, referring to disputed validation, were submitted to São Paulo State Sanitation and Power Regulatory Agency (ARSESP) are under analysis. To date, differences regarding the debtor but not the amount of the debt have been identified. In the event of the change of the entity responsible for paying the bill, SABESP will transfer the charge to the corresponding Entity. (3) The interest on own capital due by SABESP to the State, related to the period from March 2004 to December 2006, totaling R$400,823, restated between June 2007 and November 2007, based on the Selic (central Bank overnight rate), was paid in the period from January to March 2008. (4) The State and SABESP agreed on immediately resuming the compliance with their mutual obligations under new assumptions: (a) implementation of an electronic bill management system to facilitate and speed up the monitoring of payment processes and budget management procedures; (b) structuring of the Rational Water Use Program (PURA) to rationalize the consumption of water and the amount of the water and sewage bills under the responsibility of the State; (c) establishment, by the State, of criteria for budgeting so as to avoid the reallocation of amounts to a specific water and sewage accounts as from 2008; (d) possibility of registering state bodies and entities in a delinquency system or reference file; (e) possibility of interrupting water supply to state bodies and entities in the case of nonpayment of water and sewage bills.

Approximately 98% of the billing from November 2007 to December 2009 has already been paid by the State Government.

(vi) Third Amendment to the Gesp Agreement

Gesp, SABESP and DAEE signed the Third Amendment to the Gesp Agreement on November 17, 2008, through which Gesp recognized a debt balance payable to SABESP totaling R$915,251, monetarily adjusted up to September 2008 in accordance with the fluctuation of the IPCA-IBGE, corresponding to the Undisputed Reimbursement, determined by FIPECAFI. SABESP accepted on a provisional basis the reservoirs as part of the payment of the Undisputed Reimbursement and offered to Gesp a provisional settlement, recognizing a credit totaling R$696,283, corresponding to the value of the reservoirs. The final settlement will only be effected with the actual transfer of the property with the proper Registry of Deeds Office. The outstanding balance totaling R$218,967 is being paid in 114 monthly, consecutive installments, totaling R$1,920 each, including the annual IPCA/FIPE fluctuation, plus interest of 0.5% p.m., the first of which fell due on November 25, 2008.

The Company and the State Government are working together on obtaining a legislative authorization to transfer the reservoirs to SABESP, overcoming the uncertainties arising from the public lawsuit mentioned in item (iii). The reservoirs will be transferred to the Company after the publication of the legislative authorization.

In addition, the Third Amendment provides for the regularization of the monthly flow of benefits. While SABESP is liable for the flow of monthly payment of benefits, the State shall reimburse SABESP based on F-71 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) criteria identical to those applied when determining the Undisputed Reimbursement. Should there be no preventive court decision, the State will assume the flow of the portion of monthly payments of benefits deemed as undisputed.

(vii) As mentioned b above on November 17, 2008 the Company and the State signed the Third Amendment to the GESP Agreement, when the reimbursements called disputed and undisputed were quantified. This amendment established the efforts to calculate the so-called Disputed Reimbursement of the Benefits. Under clause four (4) of the amendment, the Disputed Reimbursement represents the difference between the Undisputable Reimbursement and the amount actually paid by the Company as Pension benefits and survivors’ pensions set out in Law 4819/58, for which, the Company understands, the State of São Paulo is originally liable, but paid by SABESP by May 2008, under a court order.

By entering into the Third Amendment, the State’s Legal Representative (“PGE”) agreed to reassess the differences that gave rise to the disposed reimbursement of benefits set out in Law 4819/58. At the time, this expectation was based on the willingness of the PGE to reanalyze the issue and the implied right of the Company to the reimbursement, including based on opinions from outside legal advisors.

However, new opinions issued by the PGE and received on September 4 and 22, 2009 and January 4, 2010 refute, once again, the reimbursement of the largest portion of this amount. As a result, management changed its understanding on the receipt of the Disputed Reimbursement after direct negotiations with the State.

Even though the negotiations with the State are still in progress, it is no longer possible to assure that the Company will recover the receivables related to the Disputed Reimbursement an amicable manner.

SABESP shall not waive the receivables from the State to which the Company considers itself to be legally entitled. Accordingly, it will take all possible actions to resolve the issue at all technical and court levels. Should this dispute persist, the Company will take all the necessary actions to protect the Company’s interests.

In this context, the Company’s management decided to recognize net income for 2008 an allowance for the impairment of the disputed reimbursement. As of December 31, 2009, this allowance totals R$471,591. As a result of the recognition of this allowance, we also recognized the obligation related to the actuarial commitment maintained with the beneficiaries, whose right as it is paid by SABESP is for now denied by the State. As of December 31, 2009, the obligation totals R$518,027 (2008 – R$535,435). For detailed information on the actuarial obligation refer to note 13.

(b) Cash and cash equivalents

The Company’s cash and cash equivalents with financial institutions controlled by the State Government amounted to R$722,170 and R$579,750 as of December 31, 2009 and 2008, respectively. The financial income arising from these investments totaled R$73,927 and R$62,179 in the years ended December 31, 2009 and 2008, respectively. The Company must, pursuant to a State Decree, invest its surplus resources with financial institutions controlled by the State Government.

In its operations, the Company uses the Guarapiranga and Billings reservoirs; should these reservoirs not be available for use to the Company, there could be the need to collect water from more distant places. The Company does not pay any fee for the use of these reservoirs but it is responsible for their maintenance and operating costs.

(d) Agreements with lower tariffs with State and Municipal Government Entities that joined the Rational Water Use Program (PURA).

The Company has signed agreements with government entities related to the State Government and municipalities where it operates involving approximately 6,803 properties that benefit from a reduction of 25% in the tariff of water supply and sewage collection services when they are not in default. These agreements provide for the implementation of the rational water use program, which takes into consideration the reduction in the consumption of water.

F-72 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) (e) Guarantees

The State Government provides guarantees for some loans and financing of the Company and does not charge any fee with respect to such guarantees.

(f) Sesamm

On August 15, 2008, as part of its growth process, the Company, together with the companies OHL Médio Ambiente, Inima S.A.U. Unipersonal (a “Inima”), Técnicas y Gestión Medioambiental S.A.U. (a “TGM”) and Estudos Técnicos e Projetos ETEP Ltda. (“ETEP”) incorporated the company Sesamm – Serviços de Saneamento de Mogi Mirim S/A (“Sesamm” or the “Subsidiary”), which is engaged in the provision of complementary services to the sewage diversion system and implementing and operating a sewage treatment system in the municipality of Mogi Mirim, including the disposal of generated solid waste, as described in note 7.

(g) Personnel assignment agreement among entities related to the State Government

The Company has personnel assignment agreements with entities related to the State Government, under which the expenses are fully passed on and monetarily reimbursed.

In 2009, the expenses related to personnel assigned by SABESP to other state government entities amounted to R$5,359 (2008 - R$5,503).

In the same period, the expenses related to personnel assigned by other entities to SABESP totaled R$335 (2008 - R$1,267).

(h) Services obtained from state government entities

As of December 31, 2009, SABESP had an outstanding amount payable of R$10,384 for services rendered by São Paulo state government entities, including the supply of electric power by Companhia Energética de São Paulo – CESP, which corresponds to 86% of the balance payable.

Expenses related to construction works performed by DAEE amount to R$11,135.

(i) Non operating assets

As of December 31, 2009 and 2008, the Company had an amount of R$26,479 mainly related to free land leased to the associations, support entities, non–governmental organizations and to DAEE (Water and Electricity Department), among others. The free land leased to DAEE amounts to R$2,289.

(j) Sabesprev

The Company sponsors a private defined benefit pension plan, which is operated and administered by Fundação SABESP de Seguridade Social - Sabesprev. The net actuarial liability recognized as of December 31, 2009 amounts to R$480,103 (2008 - R$419,871).

Management is making efforts to ensure the State maintains payments with respect to transactions with related parties.

6. INDEMNITIES RECEIVABLE

Indemnities receivable are a noncurrent asset that represents amounts receivable from the Municipalities of Diadema and Mauá as an indemnity for their unilateral termination of the concessions for water supply and sewage collection services of the Company in 1995. As of December 31, 2009 and 2008, this asset totaled R$146,213 and R$148,794 (nominal amounts), respectively.

F-73 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) The net book value of property, plant, and equipment relating to the municipality of Diadema, reclassified in December 1996, amounted to R$75,231, and the indemnity balance from the municipality amounted to R$60,295 (2008 - R$62,876).

The net book value of property, plant, and equipment relating to the municipality of Mauá, reclassified in December 1999, totaled R$103,763, and the indemnities receivables the municipality totaled R$85,918.

The Company’s right to recover these amounts have been challenged by the municipalities.

SABESP filed lawsuits to collect the amounts due by the municipalities. With respect to Diadema, the decision of the lower court judge was unfavorable to SABESP, which filed an appeal in November 2000. In December 2005, SABESP’s appeal to have the agreement entered into with the municipality of Diadema declared valid was partially accepted. Even though this Municipal Government filed appeals against this decision, they were all denied and a o final and unappealable decision was issued in April 2009. In December 2007, the decision that accepted the execution of the Companhia de Saneamento the Diadema – Saned was rendered, ordering this company to be summoned to pay the full amount of the debt within 15 days under the penalty of fine. Saned filed an interlocutory appeal against the decision but the appeal was rejected by the Court of Justice in June 2008. The judge approved the seizure of cash from Saned’s bank accounts and short-term investments (online seizure) of up to 10% of the adjusted debt. An appeal was filed against this decision, but the Appellate Court upheld the final and unappealable decision. R$2,919 were seized and withdrawn on March 3, 2009. Subsequently, the Court of Justice issued an injunction determining the seizure through weekly deposits by Saned in the amount corresponding to 20% of everything received in its bank accounts and short-term investments. This injunction was confirmed in sentence of the Court of Justice, which can still be appealed.

On December 29, 2008, Saned and the City of Diadema entered into a Letter of Intent with the São Paulo State and SABESP for the purpose of preparing studies and conducting negotiations to guide Diadema’s and SABESP’s decisions, aiming to establish SABESP as the exclusive provider of water supply and sewage collection services for the City of Diadema.

The parties agree that the settlement of the existing conflicts between the companies is indispensable for the proper development of the public utility services of water supply and sewage collection in the municipality of Diadema.

In January 2009, the parties filed a joint petition requesting the suspension of new seizures, for a three- month period, trying to enable an agreement. The suspension was confirmed by the Tax Court. As the settlement on which a possible agreement will be based was maintained, the suspension request was renewed in April 2009, October 2009, and January 2010.

With respect to Mauá, a lower court decision demanded this Municipality to pay the amount of R$153.2 million as a compensation for loss of profits. In April 2005, the City of Mauá filed an appeal against this decision. On July 2006, the decision was converted into a measure consisting of an expert clarification on the amount of the indemnity for loss of profits. The clarification was provided on December 2007, and the expert confirmed the amount of the loss of profits determined by the lower court. In August 2008, the Court of Justice decided for the integral maintenance of the lower court decision. The Municipal Government of Mauá filed special and extraordinary appeals against the decision that confirmed the sentence to indemnify Sabesp. Both appeals were denied by the Court of Justice, which led to the filing of a bill of review with the Superior Court of Justice and Federal Supreme Court.

Based on the opinion of its legal advisors, management continues to state that the Company is entitled to receive the amounts related to the indemnity and continues to monitor the status of the lawsuits.

7. INVESTMENTS Equity share of results of in 2008 subsidiaries 2009 Sesamm 3,832 (218) 3,614 Other 720 - 720 Total 4,552 (218) 4,334

On August 15, 2008, the company Sesamm – Serviços de Saneamento de Mogi Mirim S/A was incorporated for a period of 30 years, from the date the concession agreement with the municipality was executed, for the purpose of providing complementary services to the sewage diversion system and

F-74 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) implementing and operating a sewage treatment system in the municipality of Mogi Mirim, including the disposal of generated solid waste.

Sesamm’s capital as of December 31, 2009, totaling R$ 10,669, is represented by 10,669,549 registered shares without a par value, and SABESP holds 36% of its equity interest.

The Company entered into an agreement which provides veto power for certain situations together with Médio Ambient Inima S/A.

8. PROPERTY, PLANT AND EQUIPMENT PARENT COMPANY

2009 2008

Adjusted Accumulated cost depreciation NET NET In use Water systems: Land 952,163 - 952,163 954,919 Buildings 2,682,852 (1,716,902) 965,950 1,055,391 Connections 1,019,636 (446,680) 572,956 594,865 Water meters 304,139 (155,852) 148,287 146,339 Networks 3,488,399 (1,187,959) 2,300,440 2,311,790 Wells 183,334 (105,179) 78,155 84,485 Equipment 573,424 (401,513) 171,911 169,713 Other 17,744 (14,048) 3,696 2,710 9,221,691 (4,028,133) 5,193,558 5,320,212 Sewage systems: Land 346,382 - 346,382 347,151 Buildings 1,647,682 (743,323) 904,359 899,405 Connections 947,533 (443,408) 504,125 514,481 Networks 5,741,254 (1,436,306) 4,304,948 4,224,754 Equipment 621,009 (458,691) 162,318 156,731 Other 2,625 (1,960) 665 2,044 9,306,485 (3,083,688) 6,222,797 6,144,566 General use: Land 91,452 - 91,452 107,696 Buildings 135,550 (92,473) 43,077 53,204 Transportation equipment 141,811 (121,625) 20,186 19,217 IT equipment 117,403 (73,503) 43,900 35,246 Furniture, fixtures and equipment 248,704 (133,038) 115,666 124,093 Land used 20,488 - 20,488 20,556 Assets by third parties 8,411 (2,488) 5,923 5,923 763,819 (423,127) 340,692 365,935 Subtotal in use 19,291,995 (7,534,948) 11,757,047 11,830,713

Construction in progress: Water systems 1,507,673 - 1,507,673 884,099 Sewage systems 2,166,018 - 2,166,018 1,628,289 Other 10,318 - 10,318 7,400 Subtotal in progress (d) 3,684,009 - 3,684,009 2,519,788

Grand total 22,976,004 (7,534,948) 15,441,056 14,350,501

The consolidated balance totals R$15,443,211, where the R$2,140 difference refers to sewage treatment projects and the R$15 difference basically represents furniture, fixtures and equipment.

In 2009, we reclassified to intangible assets some property, plant and equipment items to improve their presentation. The reclassified items refer to the renewals of concession agreements under program contracts. These reclassifications were retrospectively applied to 2008 for comparability purposes. The R$14,926,433 total disclosed in 2008 decreased to R$14,350,501 after the reclassifications.

F-75 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) Property, plant and equipment represent assets used in the provision of water supply and sewage collection services in 352 municipalities. SABESP is both the owner and the manager of the assets arising from agreements negotiated based on economic and financial reports and program contracts.

The concession agreements provide for the assets to be handed over to the concession grantor at the end of the term, which will be reimbursed at residual amount or fair value, pursuant to each agreement provisions. In the program contracts, the reimbursement will correspond to the present value of the cash flows for the remaining period on the date services are resumed, monetarily restated, plus interest to the date of actual payment.

(a) Depreciation

Review and adjustment of estimated useful lives The Company analyzed its property, plant and equipment to review and adjust the estimated useful lives used in the calculation of depreciation. For this analysis, the Company engaged a specialized company, which issued a valuation report. The appraiser considered the Company’s operating planning for the coming years, our background and the items, maintenance and use levels, outside benchmarks, such available technology, manufacturers’ recommendations and manuals, and the assets’ life span to prepare its report. The new estimated remaining useful lives of property, plant and equipment items, compared with the current estimated useful lives, is shown in the table below, and has been prospectively accounted for beginning January 1, 2009. Current rates Property, plant and equipment items 2009 2008 Buildings 2% 4% Connections 2% 5% Water meters 10% 10% Networks 2% 2% Wells 5% 5% Equipment 5% 10% Transportation equipment 10% 20% Furniture and fixtures 6.7% 10%

The effects of this study in 2009 resulted in a R$45,018 decrease of depreciation allocated to the operating costs and expenses.

(b) Disposals of property, plant, and equipment

(i) In 2009, the Company wrote off property, plant and equipment items totaling R$43,090, which resulted in a total loss of R$22,852 (2008 - R$20,632). Of the total loss, R$15,650 (2008 - 12,105) refers to items in use, due to obsolescence, theft and misplacements, R$6,899 (2008 – 8,527) to discontinued construction, unproductive wells and projects considered economically unfeasible, and R$303 to loss on sale of part of the land of the Theodoro Ramos water treatment plant (WTA).

(ii) In 2008, the Company recorded losses on property, plant and equipment totaling R$137,346 referring to leasehold improvements (DAEE – Sistema Produtor Alto Tietê).

The Company capitalized interest and monetary restatement, including exchange rate changes, in property, plant and equipment totaling R$143,985 in the year ended December 31, 2009, (2008 – R$219,430) and during this period these assets were presented as construction in progress.

(d) Construction in progress

Construction in progress refers mainly to new projects and operating improvements and is represented by: PARENT COMPANY

2009 2008 Water systems: Networks and connections 447,246 276,793 Transmission 65,120 21,439 Water treatment 291,677 86,053 Sub-transmission 535,125 337,222

F-76 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) Production and storage 131,617 114,638 Other 36,888 47,954 Total water systems 1,507,673 884,099 Sewage systems: Collection 1,527,401 1,223,576 Treatment 547,785 284,560 Other 90,832 120,153 Total sewage systems 2,166,018 1,628,289 Other 10,318 7,400 Total 3,684,009 2,519,788

The consolidated balance totals R$3,686,149, and the difference of R$2,140 is represented by sewage treatment projects.

The estimated disbursements related to already contracted investments total approximately R$3,741 million for the years from 2010 to 2015 (unaudited).

(e) Expropriations

As a result of the construction of priority projects related to water and sewage systems, the Company was required to expropriate or establish rights of way in third-parties’ properties, and the owners of these properties will be compensated either amicably or through the courts.

The amount of compensation to be paid starting in 2010 is estimated at approximately R$526 million (unaudited) which will be paid with the company’s own funds. The assets to be received as a result of these negotiations will be recorded as property, plant, and equipment after the transaction is completed. In 2009, the amount related as expropriations was R$6,244 (2008 – R$11,004).

(f) Assets pledged as guarantee

As of December 31, 2009 and 2008, the Company had assets totaling R$249,034 offered as guarantee of the request for the Paes (tax debt refinancing program) (note 12).

(g) Nonoperating assets

As of December 31, 2009, the Company had R$26,411 (2008 - R$26,479) mainly related to free land leased to the associations, welfare entities, non-governmental organizations and to DAEE (Water and Electricity Department), among others.

(h) Revaluation

Property, plant and equipment items were revalued in 1990 and 1991 and are depreciated at annual rates that correspond to their remaining useful lives.

As allowed by CVM Instruction 197/93, the Company did not accrue the deferred tax effect on the appreciation arising from the revaluation of property, plant and equipment in 1990 and 1991. Should income tax and social contribution be recognized on the revaluation reserve, the amount too as of December 31, 2009 would total R$337,063 (2008 – R$371,088). The amounts of R$86,817 and R$107,912 of the revaluation reserves were realized in the years ended December 31, 2008 and 2009, respectively.

The Company’s management opted to maintain the revaluation reserve until its actual realization.

(i) Fully depreciated assets

As of December 31, 2009, the carrying amount of the fully depreciated assets that are still in use is R$955,893 (2008 - R$882,707).

9. INTANGIBLE ASSETS PARENT COMPANY AND CONSOLIDATED

2009 2008 Concessions (i) 504,145 509,724 Program contracts (commitments) (ii) 258,802 249,639 Software license (iii) 9,565 9,602 F-77 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) Program contracts - investments made (iv) 772,791 622,383 Total 1,545,303 1,391,348

(i) Concessions

From 1999 to 2006, the negotiations for new concessions were conducted on the basis of the economic and financial profit or loss of the transaction, determined in a valuation report issued by independent experts.

The amount determined in the related agreement, after the transaction is closed with the municipal authorities, realized through the subscription of Company shares or in cash, is recorded in this account and amortized over the period of the related concession (usually 30 years). As of December 31, 2009 and 2008 there were no amounts pending related to these payments to the municipalities.

The net amount shown relates to concessions with the following municipalities:

PARENT COMPANY AND CONSOLIDATED 2009 2008 Accumulated Cost amortization Net Net Agudos 10,145 (2,854) 7,291 6,229 Bom Sucesso do Itararé 926 (97) 829 674 Campo Limpo Paulista 19,556 (4,607) 14,949 13,782 Conchas 4,166 (888) 3,278 3,056 Duartina 2,045 (487) 1,558 1,445 Estância de Serra Negra 15,604 (3,102) 12,502 13,077 Itapira 16,360 (1,330) 15,030 14,818 Itararé 6,536 (2,079) 4,457 4,603 Marabá Paulista 1,895 (272) 1,623 1,702 Miguelópolis 11,685 (1,967) 9,718 9,222 Osasco 296,721 (89,676) 207,045 216,599 Paraguaçu Paulista 25,911 (5,664) 20,247 10,980 Paulistânia 212 (46) 166 117 Sandovalina 2,556 (338) 2,218 2,307 Santa Maria da Serra 1,196 (359) 837 859 São Bernardo do Campo 237,464 (46,937) 190,527 198,483 Várzea Paulista 16,323 (4,453) 11,870 11,771 Total 669,301 (165,156) 504,145 509,724

Intangible assets are amortized over the term of the concession agreements entered into with the related municipalities.

In 2009 and 2008, amortization expenses related to concession intangible rights were R$23,007 and R$21,509, respectively.

(ii) Program contracts (commitments)

After the enactment of the regulatory framework, renewals are made through program contracts. In some program contracts the Company assumed commitments to financially participate in social and environmental sanitation actions. These commitments were recorded as a contra entry to intangible assets totaling R$271,194 net of the adjustment to present value of R$81,726. These commitments are being amortized according to the effective period of the program contract (mostly 30 years).

The committed amounts refer to the following municipalities:

PARENT COMPANY AND CONSOLIDATED 2009 2008 Accumulated Municipality Cost amortization Net Net Alfredo Marcondes 70 (5) 65 68 Aparecida D’Oeste 45 (2) 43 44 Auriflama 110 - 110 - Avaré 5,000 (250) 4,750 4,917 Bento de Abreu 50 (3) 47 48 F-78 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) Bocaina 800 (53) 747 773 Caçapava 9,000 (450) 8,550 8,850 Campos do Jordão 3,000 (233) 2,767 2,867 Capão Bonito 2,000 (100) 1,900 1,967 Emilianópolis 112 (9) 103 107 Fartura 243 (12) 231 239 Fernandópolis 9,500 (633) 8,867 9,183 Franca 20,676 (1,666) 19,010 19,700 Indiaporã 250 (13) 237 246 Irapuã 260 - 260 - Jales 4,426 (344) 4,082 4,229 Lorena 9,000 (600) 8,400 8,700 Magda 320 - 320 - Mococa 8,843 (442) 8,401 8,697 Mombuca 197 (13) 184 190 Monte Alto 5,000 (264) 4,736 4,903 Novo Horizonte 5,000 (250) 4,750 4,917 Pindamonhangaba 16,000 (889) 15,111 15,644 Piratininga 350 (19) 331 343 Planalto 39 (3) 36 37 Pongaí 35 - 35 - Quatá 1,000 - 1,000 - Riolândia 2,643 (132) 2,511 2,599 São João da Boa Vista 16,700 (835) 15,865 - São José dos Campos 142,945 (4,766) 138,179 142,945 São Luiz Paraitinga 600 (40) 560 580 São Manuel 1,300 (65) 1,235 1,278 Tupã 5,540 (292) 5,248 5,432 Valentim Gentil 140 (9) 131 136 Total 271,194 (12,392) 258,802 249,639

In 2009, amortization expenses related to the program contracts total R$9,260 (2008 –R$3,131).

The amounts not yet disbursed related to program contracts are recorded in ‘Other obligations’ in current liabilities, R$45,584, and noncurrent liabilities, R$93,292.

(iii) Software licenses

As of December 31, 2009, the net amount of software licenses was R$9,565 (2008 – R$9,602).

(iv) Program contracts – investments made

These refer to the renewals of contracts previously denominated as full concession to operation concession, through program contracts with the purpose of providing municipal public utility services of water supply and sewage collection, under which the Company is both the owner and the manager of the assets purchased or built during the period of these contracts (30 years).

PARENT COMPANY AND CONSOLIDATED 2009 2008 Accumulated Cost amortization Net Net Water systems Land 7,561 (310) 7,251 7,817 Buildings 47,955 (2,180) 45,775 42,886 Connections 29,301 (1,213) 28,088 21,573 Water meters 17,758 (751) 17,007 11,898 Networks 86,719 (3,831) 82,888 75,886 Wells 12,462 (681) 11,781 11,723 Equipment 14,381 (633) 13,748 9,400 Other 5,750 (250) 5,500 255 Subtotal 221,887 (9,849) 212,038 181,438 Sewage systems Land 2,332 (102) 2,230 2,226 Buildings 49,431 (2,666) 46,765 52,544 Connections 38,014 (1,717) 36,297 30,913 F-79 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) Networks 121,987 (5,537) 116,450 109,583 Equipment 17,631 (869) 16,762 12,728 Other 9,914 (479) 9,435 6 Subtotal 239,309 (11,370) 227,939 208,000 General use Land 9 - 9 9 Buildings 392 (26) 366 957 Transportation equipment 6,068 (312) 5,756 2,750 IT equipment 1,153 (56) 1,097 342 Furniture, fixtures and equipment 6,137 (293) 5,844 4,611 Subtotal 13,759 (687) 13,072 8,669 Total 474,955 (21,906) 453,049 398,107

Construction in progress: Water systems 74,516 - 74,516 51,730 Sewage systems 244,891 - 244,891 172,055 Other 335 - 335 491 Subtotal in progress 319,742 - 319,742 224,276 Grand total 794,697 (21,906) 772,791 622,383

The assets of the municipalities are amortized over the period of the program contracts.

F-80 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated)

10. LOANS AND FINANCING PARENT COMPANY AND CONSOLIDATED 2009 2008 Annual interest Monetary Current Noncurrent Total Current Noncurrent Total Guarantees Maturity rates restatement LOCAL CURRENCY São Paulo St. Govt. and Own Federal Government/Banco do Brasil 288,833 1,127,136 1,415,969 263,497 1,406,001 1,669,498 funds 2014 8.50% UPR th 6 issue debentures 225,755 - 225,755 240,346 229,690 470,036 No guarantees 2010 11% IGP-M th 7 issue debentures 121,380 - 121,380 200,000 123,497 323,497 No guarantees 2010 10.8% IGP-M th 8 issue debentures - 418,535 418,535 350,000 425,831 775,831 No guarantees 2011 10.75% IGP-M CDI+2.75% (1st series) & th 9 issue debentures - 223,741 223,741 - 218,146 218,146 No guarantees 2015 12.87% (2nd series) IPCA TJLP + 1.92% (1st & 3rd series) & 9.53% (2nd th 10 issue debentures - 274,476 274,476 - - - No guarantees 2020 series) IPCA Caixa Econômica Federal 78,871 679,992 758,863 68,840 567,149 635,989 Own funds 2010/2031 6.8% (weighted) UPR Promissory Notes - 898,447 898,447 - - - 2015 CDI + 3.5% FIDC – Sabesp I 55,556 13,889 69,445 55,556 69,444 125,000 Own funds 2011 CDI + 0.70% National Bank for Economic and Social Development (BNDES) 42,857 83,940 126,797 42,814 126,657 169,471 Own funds 2013 3% + TJLP 6% LIMIT National Bank for Economic and Social Development (BNDES) – coastal region - 130,473 130,473 - 32,145 32,145 2019 2.5%+TJLP 6% LIMIT National Bank for Economic and Social Development – BNDES PAC - 14,602 14,602 - - - Own funds 2023 2.15% + TJLP 6% LIMIT Other 3,276 11,575 14,851 2,802 13,586 16,388 2010/2018 12% / CDI /TJLP + 6% UPR Interest and charges 112,297 7,961 120,258 118,843 29,281 148,124 Total local 928,825 3,884,767 4,813,592 1,342,698 3,241,427 4,584,125 FOREIGN CURRENCY Currency Basket Inter-American Development Bank (IADB) Federal Fluctuation + US$374,647,000 (2008 – US$412,260,000) 64,250 588,085 652,335 86,420 877,031 963,451 Government 2016/2025 3.00% to 4.93% (i) US$ Eurobonds – US$140,000,000 (2008 – US$140,000,000) - 243,768 243,768 - 327,180 327,180 2016 7.5% US$

JBIC - ¥21,316,000,000 Federal (2008 - ¥15,116,861,000) - 400,932 400,932 - 390,015 390,015 Government 2029 1.8% and 2.5% (i) Yen IADB 1983AB – US$250,000,000 ( 2008 – US$250,000,000) - 431,911 431,911 - 580,595 580,595 2023 4.47% to 4.97% (i) US$ Interest and charges 17,462 - 17,462 19,742 - 19,742 Total foreign 81,712 1,664,696 1,746,408 106,162 2,174,821 2,280,983 TOTAL LOANS AND FINANCING 1,010,537 5,549,463 6,560,000 1,448,860 5,416,248 6,865,108

Exchange rate as of December 31, 2009: US$1.7412; Yen 0.018809 - (2008 – US$2.3370; Yen 0.02580) As of December 31, 2009, the Company did not have any balances of loans and financing raised in the short-term

(i) Statement of annual interest rates per agreement, summarized in the general table F-81 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated)

2009 2008 Current Noncurrent Total Current Noncurrent Total Interest rate IADB agreement 713 41,517 290,622 332,139 55,909 447,270 503,179 4.26% IADB agreement 896 4,837 29,020 33,857 6,492 45,442 51,934 3.00% IADB agreement 1212 17,896 268,443 286,339 24,020 384,318 408,338 4.93% JICA consulting 229,539 229,539 171,175 171,175 1.80% JICA works 171,393 171,393 218,840 218,840 2.50% IADB agreement 1983 A 174,120 174,120 233,700 233,700 4.97% IADB agreement 1983 B1 174,120 174,120 233,700 233,700 4.67% IADB agreement 1983 B2 87,060 87,060 116,850 116,850 4.47%

(ii) As required by CPC 08, we prepared the table below to show the annual effects of financial expenses arising from borrowing costs at the effective interest rate.

2016 and 2010 2011 2012 2013 2014 2015 thereafter Total Annual interest Debentures - 9th issue - series 1 291 292 293 244 - - - 1,120 0.285402% Debentures - 9th issue - series 2 254 254 255 255 256 213 - 1,487 0.207581% Debentures - 10th issue - series 1 37 37 37 37 37 37 179 401 0.047597% Debentures - 10th issue - series 2 39 39 39 39 39 39 193 427 0.047597% Debentures - 10th issue - series 3 55 55 55 55 55 55 268 598 0.047597% Promissory Notes 336 336 336 262 188 95 - 1,553 0.037393% IADB 1983 A 102 102 102 102 102 102 777 1,389 0.063221% IADB 1983 B1 127 127 127 128 128 128 579 1,344 0.079033% IADB 1983 B2 76 76 76 77 77 76 198 656 0.094847% Total 1,317 1,318 1,320 1,199 882 745 2,194 8,975

No premiums were paid on funds raised.

F-82 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) (a) Banco do Brasil

In March 1994, we refinanced the existing loan agreements with Caixa Econômica Federal, which assigned its receivables to the Federal Government, with Banco do Brasil acting as financial agent. Under the agreement entered into with the Federal Government, payments are made based on the Price amortization system, monthly indexed by the Standard Reference Unit (UPR), which is equal to the Government’s benchmark Interest Rate (TR), plus interest of 8.5% per year. The interest and principal amount are paid monthly with maturity in 2014. This financing is guaranteed by the São Paulo State Government by a pledge of its own revenues and revenues of the Company.

(b) Debentures

(i) 6th Issue

On September 17, 2004, the Company registered with the CVM a securities program totaling R$1,500,000. As part of this program, the Company issued on September 1, 2004, 600,000 debentures in three series, without renegotiation, with a face value of R$1 each, totaling R$600,000. The date for the financial settlement of the transaction was September 21, 2004 for the Series 1 and September 22, 2004 for the Series 2 and 3.

The debentures were placed on the market as follows:

Number Adjustment Interest Interest payment Repayment Maturity Series 1 231,813 - CDI+1.75% p.a. Semiannual Bullet payment Sep 2007 Series 2 188,267 IGP-M 11% p.a. Annual Bullet payment Sep 2009 Series 3 179,920 IGP-M 11% p.a. Annual Bullet payment Sep 2010

Interest expense totaled R$17,296 and R$26,999, in 2009 and 2008, respectively, related to Series 2, and R$24,424 and R$25,802, respectively, related to Series 3.

Series 1 of the 6th issue of debentures was fully repaid on September 3, 2007. Series 2 of the 6th issue of debentures was fully repaid on September 1, 2009.

(ii) 7th Issue

As part of the program registered with the CVM on September 17, 2004, the Company issued 300,000 debentures in three series on March 1, 2005, without renegotiation, with a face value of R$1 each, totaling R$300,000. The date of financial settlement of the operation was March 14, 2005.

The debentures were placed on the market as follows:

Interest Number Adjustment Interest payment Repayment Maturity Series 1 200,000 - CDI+1.5% p.a. Semiannual Bullet payment Mar 2009 Series 2 100,000 IGP-M 10.80% p.a. Annual Bullet payment Mar 2010

Interest expense totaled R$4,611 and R$27,171 in 2009 and 2008, respectively, related Series 1, and R$13,015 and R$13,444, respectively, related to Series 2.

Series 1 of the 7th issue of debentures was fully repaid on March 1, 2009.

(iii) 8th Issue

To terminate the program registered with the CVM on September 17, 2004, the Company issued on June 1, 2005, 700,000 debentures, using the option to increase the number of debentures allowed by up to 20%, pursuant to the provision of paragraph 2 of Article 14 of CVM Instruction 400/03, distributed in two series, without renegotiation, with a face value of R$1 each, totaling R$700,000. The date for the financial settlement of the operation was June 24, 2005. The proceeds were used for settlement of Eurobond agreement.

F-83 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) The debentures were placed on the market as follows:

Interest Number Adjustment Interest payment Repayment Maturity Series 1 350,000 - CDI+1.5% p.a. Semiannual Bullet payment Jun 2009 Series 2 350,000 IGP-M 10.75% p.a. Annual Bullet payment Jun 2011

Interest expense totaled R$18,520 and R$47,580 in 2009 and 2008, respectively, related to Series 1, and R$44,441 and R$46,357, respectively, related to Series 2.

Series 1 of the 8th issue of debentures was fully repaid on June 1, 2009.

(iv) 9th Issue

On October 23, 2008, the Company registered with the CVM a securities program for a total amount of R$3 billion and made a Public Offering of Simple Debentures, unsecured and non-convertible, of the 9th issue, in the context of said program. The characteristics of the debentures are as follows:

Series 1 Series 2

CVM registration CVM/SER/DEB/2008-029 CVM/SER/DEB/2008-030

Number 100,000 120,000

Issue Date 10/15/2008 10/15/2008

Initial value (R$’000) R$1 R$1

Yield DI plus 2.75% p.a. 12.87% p.a.

Monetary restatement None IPCA

Yield payment Semiannual Annual

Repayment * 10/15/2013 10/15/2015

Optional redemption From 24th month From 24th month

Repayment will be made in three (3) annual and consecutive installments of the same amount, the first of which falls due on October 15, 2011 for series 1 and October 15, 2013 for the series 2.

Settlement date of Series 1 was on November 7, 2008 and of Series 2 on November 10, 2008.

The funds arising from this issuance were used to refinance debts falling due.

Interest expenses totaled R$12,546 and R$3,340 in 2009 and 2008, respectively, related to Series 1, and R$16,120 and R$3,185, respectively, related to Series 2.

Financial covenants relating to the 6th, 7th, 8th, and 9th issue of debentures:

• Adjusted current ratio (current assets to current liabilities, excluding from current liabilities the current portion of noncurrent debts incurred by the Company) higher than 1.0. • Coverage ratio (EBITDA to financial expenses) equal to or higher than 1.5. • Noncompliance with these obligations will only be confirmed when verified in the quarterly financial statements for at least two consecutive quarters or two nonconsecutive quarters within a twelve-month period.

In case of noncompliance with the covenants, the trustee should call an extraordinary debentureholers’ meeting within 48 hours from the acknowledgement of the noncompliance to resolve on the declaration of accelerated maturity of the debentures.

(v) 10th Issue

On November 15, 2009, the Company launched 100 debentures, subscribed exclusively by National Bank for Economic and Social Development (BNDES). These debentures were distributed in three

F-84 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) nonconvertible series, at the nominal value of R$2,753.7, totaling R$275,370. This transactions was settled on December 15, 2009, for all series.

The debentures were placed on the market as follows:

Number Adjustment Interest Interest payment Repayment Maturity Quarterly to Nov TJLP + 2012 and monthly Monthly (from Series 1 28 - 1.92% p.a. from then on Dec 2012) Nov 2020

Annual (from Dec Series 2 30 IPCA 9.53% p.a. Annual 2013) Dec 2020

Quarterly to Nov TJLP + 2012 and monthly Monthly (from Series 3 42 - 1.92% p.a. from then on Dec 2012) Nov 2020

The funds raised in this issuance will be used in Company investments in water supply and sewage collection systems in projects: Rio Grande, North Shore, Paraíba Valley, and Mantiqueira WTSs, Piracicaba-Capivari-Jundiai Basin, and the Loss Reduction Program.

Interest expense in 2009 totaled R$755 for Series 1, R$207 for Series 2, and R$1,132 for Series 3.

Financial covenants

• EBITDA to Net revenue: equal our higher than 38% • Coverage ratio: equal to or higher than 2.35 • Net bank debt to EBITDA: equal to or higher than 3.65

Post-sanitation Program

(i) Water and sewage

Several loan agreements were entered into from 1996 to 2004 under the Pro-Sanitation Program with a view to expanding and improving the water supply and sewage systems of several municipalities of the State of São Paulo and of the City of São Paulo. Loans are collateralized by the collections of the daily billings of water supply and sewage services up to the total amount of the debt.

Contractually established repayment terms range from 120 to 180 months, after the beginning of the repayment stage.

The balance as of December 31, 2009 is R$637,611 (2008 - R$614,934), and the unused amount of these facilities is R$168,483.

The contractual charges are:

Contract signed in: 1996 1997 1998 to 2004

Interest rate 9.5% p.a. 6.5% to 8.0% p.a. 6.5% to 8.0% p.a.

During grace period: 1.0% p.a. on amount 1.0% p.a. on amount 0.6% p.a. or 2% p.a. on Risk rate disbursed disbursed debt balance Management fee 0.12% p.m. on the contract 2.0% p.a. on amount 1.0% p.a. on amount amount disbursed disbursed or 2% p.a. on debt balance for contracts entered into in 2003-2004

F-85 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) During the repayment stage:

Management fee Difference between 1.0% on the debt 1.0% p.a. on debt balance installment calculation and balance a 10.5% p.a. rate of less the 9.5% p.a. rate

(ii) Pró-Sanear Program

In 1997, 1998 and 2008, we entered into agreements under the Pró-Sanear Program for the improvement of water and sewage services, with the involvement of the communities receiving the service, in several municipalities of the Metropolitan Region of São Paulo. The credit facilities are collateralized by collections of the daily billings of water supply and sewage services up to the total amount of the debt. Repayment will be made in 180 months after the beginning of the repayment stage. As of December 31, 2009, the balance is R$18,978 (2008 – R$21,055), and the amount available for use from these facilities, for projects already in progress, is R$4,298. The financial charges are:

Interest rate – 5.0% p.a. Management fee (grace period) - 2.0% p.a. on debt balance Management fee (repayment phase) - 1.0% p.a. on debt balance Risk rate (grace period) - 1.0% p.a. on amounts disbursed

(iii) Growth Acceleration Program (PAC)

In 2007 and 2008, we entered into agreements linked to the Universal Water and Sewage Services (PAC) were entered into with several municipalities, with funds from the Government Severance Indemnity Fund for Employees (FGTS). The credit facilities are guaranteed by a monthly flow of the billings corresponding to the minimum of three times the monthly charge. Repayment will be made in 240 months after the beginning of the repayment stage. The balance as of December 31, 2009 is R$102,274, and available facilities total R$1,175,460.

The financial charges are:

Interest rate – 6% p.a. Management fee – 1.05% p.a. during the period of the contract Risk rate – 0.3% p.a. on the adjusted debt balances.

Covenants:

An Agreement for Performance Improvement sets targets for financial indicators (billing losses, revenue evasion, cash and cash equivalents and reduction of the number of days of committed receivables), and operating indicators that, based on the past two years, are annually projected for the following five years.

Noncompliance with 4 of the 8 covenant clauses will accelerate the maturity of the contract.

(d) BNDES

Contract 01.2.619.3.1 – Entered into in August 2002, totaling up to R$60,000, for the purpose of financing part of the Company’s contribution to the Tietê River Pollution Abatement Project - Stage II, related to loan agreement 1212/OC - BR with the Inter-American Development Bank (IADB). The related project is in progress and the outstanding balance as of December 31, 2009 is R$31,699 (2008 - R$42,367).

The onlending agreement 10/669.748-6, totaling R$180,000, was distributed among the financing agents as follows:

Agent Amount Unibanco – União de Bancos Brasileiros S.A. 60,000 Banco BBA Creditanstalt S.A. 51,000 Banco Alfa de Investimento S.A. 39,000 Banco Itaú S.A. 30,000 Total 180,000

F-86 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) The related project is in the performance of works stage and the debt balance as of December 31, 2009 is R$95,098 (2008 - R$127,104). The funds are onlent from BNDES to the agents and from the latter to SABESP. The onlending agreement has the same purpose as the agreement between BNDES and SABESP, and the same interest and repayment terms, as follows:

Interest – TJLP limited to 6% p.a., plus a 3% p.a. spread, paid quarterly during the grace period, and monthly in the repayment stage. The TJLP portion exceeding 6% p.a. will be added to the debt balance.

Repayment of borrowings was initiated in September 2005, with monthly payments, and conclusion scheduled for February 2013.

Loans are collateralized by part of revenues from the provision of water and sewage services.

Covenants:

• Adjusted current ratio: higher than 1.0; • Ebitda/Net Operating Revenue: equal to or higher than 38%; • Total connections (water and sewage)/own employees: equal to or higher than 520; • EBITDA/Debt Service cost: equal to or higher than 1;5; • Shareholders’ Equity to Total Liabilities: equal to or higher than 0.8.

Noncompliance with covenants will accelerate the maturity of the contract.

(e) BNDES coast region

In November 2007, the Company entered into a financing agreement with BNDES for the Environmental Recovery Program of the Santos Metropolitan Region, totaling R$129,973 with interest of 2.5% p.a. plus TJLP limited to 6%.

Repayment will be made in 96 monthly, consecutive installments, starting January 2012 to December 2019.

A portion of the Company’s revenue is pledged as guarantee for this financing.

The agreement is in progress and the debt balance as of December 31, 2009 is $130,473 (2008 – R$32,145).

(f) Receivables Investment Funds (FIDC)

On March 23, 2006, a single series of senior shares and 26 subordinated shares, held in a deposit account in the name of its holders, were issued with a unit value on issue date corresponding to R$500. The senior shares are being repaid in 54 monthly installments, starting October 2006, and their maturity is in March 2011. As of December 31, 2009, the balance of subordinated shares is R$20,138, recorded in line account ‘Other receivables’ in noncurrent assets; the balance of senior shares is R$69,445, recorded in ‘Loans and financing’. Subordinated shares were subscribed and paid up exclusively by SABESP. The Fund yield benchmark corresponds to 100% of the DI rate (a managed prime rate), plus a fixed interest coupon of 0.70% per base year of 252 business days, pursuant to the terms of its regulations.

The Fund is managed by Caixa Econômica Federal and its custodian and recording agent is Banco do Brasil S.A.

The funds raised, totaling R$250 million, were used by the Company to settle debts in 2006.

(g) Eurobonds

(i) In June 2003, the Company issued Eurobonds abroad (Eurobonds 2008) totaling US$225 million. The issue was led by The Bank of New York and the principal agent was The Bank of Tokyo Mitsubishi Ltd. The interest rate is 12% p.a., paid semiannually, and maturity is in June 2008. The funds were used for the final repayment of the US$200 million Eurobond which matured in July 2003.

On November 6, 2006, the Company settled in advance part of this loan, totaling R$272,811, with funds raised through the issue of Eurobonds (Eurobonds 2016) totaling US$140 million.

In July 2008, the Eurobond 2008 agreement, totaling R$158,256 and R$9,495 related to interest for the period, was repaid. The repayment was made with part of the AB loan. (see j bellow) F-87 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated)

(ii) On November 3, 2006, the Company issued Eurobonds abroad (Eurobonds 2016) totaling US$140 million. The issue was led by Deutsche Bank Trust Company Americas and the principal agent was Deutsche Bank Luxembourg S.A. The interest rate is 7.5% p.a., paid semiannually, and maturity is in November 2016. As discussed in (i) above, the funds raised were used for the early repayment and partial issue of US$225 million in the Eurobonds, with maturity in June 2008, and the amount redeemed was US$126,948,000.

Due to the payment in advance of Eurobonds 2008, an amendment to the loan agreement was entered into cancelling the mandatory calculation of covenants.

Covenants – for Eurobonds 2016. Limit new debt so that: . adjusted total debt to EBITDA does not exceed 3.65 . the Company’s debt service coverage ratio, determined on the date this debt was incurred, shall not be lower than 2.35.

Noncompliance with covenants will accelerate the maturity of the contract.

(h) Inter-American Development Bank (IADB)

Loan Agreement 713 – In December 1992, the Company entered into a loan agreement with the IADB for US$400 million to finance the first stage of the Tietê River Pollution Abatement Project. The repayment period started in June 1999 in semiannual installments, subject to annual floating rate interest, varying according to the loans raised by the Bank in each six-month period, and maturity in December 2017. In December 1992, the Federal Republic of Brazil signed a guarantee contract with the IADB guaranteeing the funds for the fulfillment of the contractual obligations. The outstanding balance as of December 31, 2009 is US$190,753,000, R$332,139 (2008 – R$503,179).

Loan Agreement 896 – In December 1992, the Company entered into a loan agreement with the IADB for US$50 million to finance the first stage of the Tietê River Pollution Abatement Project. Semiannual repayments started in June 1999, with annual interest of 3% and maturity in December 2016. In December 1992, the Federal Republic of Brazil signed a guarantee contract with the IADB guaranteeing the funds for the fulfillment of the contractual obligations. The outstanding balance as of December 31, 2009 is US$19,444,000, R$33,856 (2008 – R$51,933).

Loan Agreement 1212 – In July 2000, the Company entered into a loan agreement with the IADB for US$200 million to finance the second stage of the Tietê River Pollution Abatement Project. In 2008, the total disbursement for this agreement was US$2,434,000 and there are no further amounts to be disbursed. The loan is being amortized semiannually and maturity is in July 2025. Interest is being paid on a semiannual basis, based on daily balances, at an annual variable rate according to the costs of loans of the Bank in the preceding six-month period, plus a spread, and changes every six months. The debt balance as of December 31, 2009 is US$164,450,000, R$286,340 (2008 – R$408,339).

Covenants . Loan agreements 713, 896 and 1212 – Tariffs must: a) produce revenues sufficient to cover the system’s operating expenses, including administrative, operating, maintenance, and depreciation expenses; b) provide a return on property, plant, and equipment no less than 7%; and c) during project execution, the balances of short-term loans must not exceed 8.5% of shareholders’ equity.

Noncompliance with covenants will accelerate the maturity of the contract.

(i) JICA

On August 6, 2004, the Company entered into a financing agreement with the JBIC – Japan Bank For International Cooperation, guaranteed by the Federal Government, totaling ¥21,320 million, equivalent to approximately R$337,687, for the Environmental Recovery Program of the Santos Metropolitan Region. The total financing period is 25 years, with a seven-year grace period and 18 years of repayments in semiannual installments. Interest is being paid on a semiannual basis since 2006, and is 2.5% p.a. for the sewage network and 1.8% p.a. for sewage treatment facilities. The balance of this loan agreement as of December 31, 2009 was R$400,932 (2008 – R$390,015).

F-88 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) (j) AB Loan (IADB 1983AB)

On May 27, 2008, the Company entered into a loan agreement AB loan with IADB, totaling US$250,000,000.00, which was fully disbursed in June 2008. The funds obtained were used to settle Eurobonds 2008 and to partly perform the Company’s investment plan.

The characteristics of this loan agreement are as follows:

US$ Repayments from Maturity Interest (Libor + spread)

1983 A 100,000,000.00 May 2011 May 2023 2.595%+2.375%

1983 B1 100,000,000.00 May 2011 May 2020 2.595%+2.075%

1983 B2 50,000,000.00 May 2011 May 2018 2.595%+1.875%

Interest is being paid on a semiannual basis since November 2008.

The balance of this loan agreement as of December 31, 2008 was US$250,000,000, equivalent to R$435,300 (2008 - 584,250), less part of the borrowing costs, totaling R$3,390 (2008 – R$3,655), which will be repaid over the agreement term.

(k) Promissory Notes

We issued on December 1, 2009 promissory notes totaling R$900,000 as a bridge loan, corresponding to an advance of the 11th debentures issue. Net proceeds from the 11th debentures issue will be fully used to redeem the 90 SABESP 4th issue of promissory notes.

(l) Covenants

As of December 31, 2009 and 2008, the Company had met all the requirements set forth by its loan and financing agreements.

(m) Maturities of loans and financing

2010 2011 2012 2013 2014 2015 2016 and Total thereafter In local currency 928,825 925,015 526,544 898,746 249,279 727,747 557,436 4,813,592 In foreign currency 81,712 116,450 127,286 127,286 127,286 127,286 1,039,102 1,746,408

Grand total 1,010,537 1,041,465 653,830 1,026,032 376,565 855,033 1,596,538 6,560,000

11. DEFERRED TAXES

(a) Balance sheet balances

PARENT COMPANY AND CONSOLIDATED

2009 2008 In current assets (i) Deferred income tax 190,111 125,722 Deferred social contribution 68,440 45,260 258,551 170,982 In noncurrent assets (ii) Deferred income tax 389,802 320,104 Deferred social contribution 140,329 115,237 530,131 435,341 In current liabilities (iii) Deferred income tax 209 209 Deferred social contribution 75 75

F-89 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) Deferred PASEP 14,352 19,296 Deferred COFINS 23,276 44,789 37,912 64,369 In noncurrent liabilities (iv) Deferred income tax 57,780 59,468 Deferred social contribution 16,291 16,899 Deferred PASEP 20,807 17,656 Deferred COFINS 61,982 47,469 156,860 141,492 In income statement Income tax (544,485) (399,194) Deferred income tax 135,776 112,216 (408,709) (286,978) Social contribution (204,220) (149,179) Deferred social contribution 48,879 37,924 (155,341) (111,255) (i) In current assets

Calculated mainly based on temporary differences totaling R$760,443 (2008 – R$502,889).

(ii) In long-term receivables

Calculated mainly based on temporary differences totaling R$1,559,210 (2008 – R$1,280,413) for income tax and social contribution.

The Company’s management expects the realization of the long-term balance mentioned in item (ii) in 2011, in the same proportion as 2010, and the remaining balance to be realized in 2012.

(iii) Current liabilities

- Income tax and social contribution Calculated mainly based on temporary differences totaling R$837 for income tax and social contribution.

- PASEP and COFINS

Calculated substantially on billings to government entities, and the obligation is determined and the liability is recognized when the service is provided, and its settlement when the invoices are paid.

(iv) In noncurrent liabilities

- Income tax and social contribution

Calculated mainly based on temporary differences totaling R$231,120 (2008 - R$237,872) for income tax, and R$181,013 (2008 – R$187,766) for social contribution tax.

- PASEP and COFINS

F-90 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) (b) Breakdown of deferred taxes

PARENT COMPANY AND CONSOLIDATED

In current assets 2009 2008 Provisions 258,551 170,982

In long-term receivables Provisions 282,960 240,493 Social security liabilities 160,094 139,616 Other 87,077 55,232 530,131 435,341 Total deferred tax assets 788,682 606,323

In current liabilities Costs of issuance of securities 284 284 Revenue – government entities 37,628 64,085 37,912 64,369 In noncurrent liabilities Costs of issuance of securities 1,066 1,997 Profit – government entities 73,005 74,370 Revenue – government entities 82,789 65,125 156,860 141,492 Total deferred tax liabilities 194,772 205,861

The amounts recorded as income and social contribution tax expenses in the financial statements are reconciled to the statutory rates, as shown below: PARENT COMPANY AND CONSOLIDATED 2009 2008

Pre-tax income 1,937,929 461,804 Statutory rate 34% 34% Expected tax charge at statutory rate (658,896) (157,013) Permanent differences Realization of revaluation reserve (36,690) (29,518) Provision Law 4819/58 (i) (15,335) (321,135) Interest on own capital 134,013 100,704 Other differences 12,858 8,739 Income tax and social contribution (564,050) (398,233)

Current income tax and social contribution (748,705) (548,373) Deferred income tax and social contribution 184,655 150,140 Effective rate 29% 86%

(i) Permanent difference related to the allowance for losses on the disputed reimbursements of benefits under State Law 4819/58 and the reserve related to the actuarial obligation therefrom (note 5 (vii)).

(d) Transitional Tax Regime (RTT)

The Company opted to adopt the Transitional Tax Regime (RTT), established by Provisional Measure 449/08. Accordingly, the effects from the changes in Law 11638/07 and from articles 36 and 37 of the said Provisional Measure had no effects for tax purposes. Due to the adoption of this regime, the Company maintained the tax incentives arising from donations and government subsidies for investments and the tax deductibility for costs on issuance of securities, which are now recorded as a reduction of the accounts payable. F-91 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated)

12. TAXES PAYABLE

Current Noncurrent 2009 2008 2009 2008 Income tax 60,146 3,742 - - Social contribution 28,491 6,114 - - COFINS and PASEP 51,077 37,766 - - PAES (tax debt refinancing program) 34,012 32,631 85,029 114,210 INSS (Social Security contribution) 23,708 21,406 -- Other 21,428 28,750 - - Total 218,862 130,409 85,029 114,210

The Company applied for enrollment in PAES on July 15, 2003, in accordance with Law No. 10684 of May 30, 2003, and included in its application the debts related to COFINS and PASEP which were involved in a legal action challenging application of Law 9718/98, and the outstanding balance under the Tax Recovery Program (REFIS). The total amount included in PAES was R$316,953, as follows.

Tax Principal Fine Interest Total

COFINS 132,499 13,250 50,994 196,743 PASEP 5,001 509 2,061 7,571 REFIS 112,639 - - 112,639 Total 250,139 13,759 53,055 316,953

The debt is being paid in 120 months. The amounts paid in 2009 and 2008 were R$33,386 and R$34,114 respectively, and financial expenses of R$5,585 and R$8,281, respectively, were recorded. The outstanding balance as of December 31, 2009 was R$119,041. The assets offered as guarantee in REFIS, totaling R$249,034, are still guaranteeing the amounts in the PAES program.

13. PENSION PLAN OBLIGATIONS

(a) Welfare plan

The welfare plan is managed by Fundação Sabesp de Seguridade Social – Sabesprev and consists of optional, free choice, health plans sponsored by contributions of SABESP and the participants, as follows:

Company: 7.5% (2008 – 7.1%) on average, of gross payroll; Participating employees: 3.21% of base salary and premiums, equivalent to 2.3% of gross payroll, on average.

(b) Pension plan benefits

Managed by Fundação SABESP de Seguridade Social - SABESPrev, the defined benefit pension plan is sponsored by monthly contributions as follows: 2.10% from the Company and 2.3% from the participants. In order to meet the provisions of CVM Resolution No. 371 of December 13, 2000, the amounts of the pension and retirement benefits granted or to be granted, to which employees are entitled after retirement, are presented below

Based on independent actuarial reports as of December 31, 2009, calculated in conformity with the Projected Unit Credit Method, SABESP had a net actuarial liability of R$480,103 (R$419,871 in 2008) representing the difference between the present value of the Company’s obligations to the participating employees, retired employees, and pensioners, and the value of the related assets, as shown below: PARENT COMPANY AND CONSOLIDATED (i) Reconciliation of assets and liabilities 2009 2008

Present value of actuarial liabilities (1,422,993) (1,433,710) Fair value of assets 982,422 976,545

F-92 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) (Losses) Gains to be recognized in future years (39,532) 37,294 Net liability recognized in balance sheet (480,103) (419,871)

(ii) Expenses recognized in the statement of income

Current service cost 31,116 33,347 155,514 164,124 Cost of interest Expected return on plan assets (92,309) (117,317) Employee contributions (21,235) (13,025) Total 73,086 67,129

(iii) Changes in net actuarial liabilities

Present value of the net actuarial liability in the (419,871) (365,234) beginning of the year Current service cost (31,116) (33,347) Cost of interest (155,514) (164,124) Expected return on plan assets 92,309 117,317 Employee contributions 21,235 13,025 (492,957) (432,363) Contributions by the Company in the year 12,854 12,492 Present value of the net actuarial liability at (480,103) (419,871) yearend

(iv) Changes in the fair value of assets

Fair value of plan assets at beginning of year 976,545 969,440 Actual return on plan assets 19,501 40,723 Actual contributions in the year 34,089 25,517 Benefits paid (47,713) (59,135) Fair value of plan assets at end of year 982,422 976,545

(v) Change in the present value of obligations

Present value of obligations at beginning of year 1,433,710 1,386,563 Current service cost 31,116 33,347 Cost of interest 155,514 164,124 Benefits paid (47,713) (59,135) Gain on present value of obligations (149,634) (91,189) Present value of obligations at end of year 1,422,993 1,433,710

(vi) Expected expenses 2010 2009

Cost of current service 28,079 31,116 Cost of interest 154,352 155,514 Expected return on plan assets (98,242) (92,309) Employee contributions (23,657) (21,235) Total 60,532 73,086

(vii) Actuarial assumptions

Several statistical and other factors that attempt to project future events are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets and the rate of future salary increases. In addition, the actuary also uses subjective factors such as termination, turnover and mortality rates to estimate these factors. The actuarial assumptions used by the Company are reviewed on a regular basis and may differ materially from actual results due to changing market and economic conditions, regulatory events, judicial rulings, higher or lower termination/withdrawal rates or longer or shorter life spans of participants. Such differences may result in a significant impact on the amount of pension expense recorded by the Company.

F-93 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated)

Economic assumptions 2009 2008

Demographic assumptions for 2009 2008 Mortality table AT 83 AT 83 Disability mortality table RRB 44 RRB 44 Disability table RRB 44 RRB 44 Turnover table Prudential Prudential Retirement age First age with First age with entitlement to entitlement to one of the one of the benefits benefits % active participants married at time of retirement 95% 95% Age difference between participants and their spouses Wives are 4 Wives are 4 years younger years younger than husbands than husbands The assumptions used for the actuarial valuation were as follows: The number of active participants as of December 31, 2009 was 15,145 (15,448 in 2008). The number of inactive participants as of December 31, 2009 was 4,751 (4,579 in 2008).

The evaluation of the SABESPREV plan is made by an independent actuarial expert, based on different assumptions than those adopted for purposes of ascertaining benefits to employees, as set forth in CVM Resolution 371. SABESPREV’s technical deficit as of December 31, 2009 is R$582,819 (2008 – R$500,266). The calculation is substantially different as for the actuarial method in calculating risk benefits before retirement, with sharing to SABESPREV and capitalization for the purpose of meeting CVM Resolution 371.

The Sponsor and the SABESPREV are in process of negotiation so that the technical deficit is resolved, by changing from the Defined Benefit Plan to Variable Contribution Plan. Management expects not to incur in additional costs resulting from the change of the referred plans.

As described in note 5, the Company is paying, under a court decision, former employees’ pension and survivors’ benefits.

As established by Law 4819/58, the benefit plan includes supplementing official social security pensions, supplementing permanent disability pensions, and supplementing survivors’ benefits.

This benefit plan does not receive any contributions from the plan managed by SABESPREV and, therefore, there are no guaranteeing assets.

As of December 31, 2009, based on an independent report, the actuarial commitment related to the future payment of benefits was R$1,157,095 (2008 - R$1,338,587). The actuarial liability recognized was R$518.0 million (2008 – R$535.4 million) and corresponds to the disputed reimbursement of this liability not reimbursed by the State.

The number of active participants as of December 31, 2009 was 2,727 (2008 - 2,801). The number of beneficiaries, retirees and survivors as of December 31, 2009 was 2,602 (2008 in 2,658). The other assumptions used in the actuarial calculation are as described above.

F-94 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated)

14. PROFIT SHARING

As a result of negotiations held by the Company with entities representing the employees, a Profit Sharing Program was implemented, and for the period from January to December 2009, resulted in the payment of the amount corresponding to up to one month’s payroll, depending on achievement of targets. In 2009, SABESP accrued R$53,407 (2008- R$53,216).

15. PROVISIONS FOR CONTINGENCIES

(a) Lawsuits with probable likelihood of loss

The Company is party to a number of claims and legal proceedings arising in the normal course of business, including civil, tax, labor and environmental matters. Management, based on a joint analysis with its legal advisors, recognized provisions at an amount considered sufficient to cover probable losses. These provisions, net of escrow deposits, are as follows:

PARENT COMPANY AND CONSOLIDATED 2009 2008 Customer claims (i) 783,561 659,875 Supplier claims (ii) 341,478 222,372 Other civil claims (iii) 155,030 152,446 Tax lawsuits (iv) 28,757 26,291 Labor lawsuits (v) 101,463 41,222 Environmental lawsuits (vi) 58,531 55,442 Total 1,468,820 1,157,648

Current 643,863 459,395 Noncurrent 824,957 698,253

Changes to the provisions for contingencies for the year ended December 31, 2009 are shown below:

Interest, monetary Deduction restatement 2008 Additions s and reversals 2009 Customer claims 696,588 136,928 (139,115) 170,537 864,938 Supplier claims 225,355 81,592 (22,660) 57,766 342,053 Other civil claims 156,244 25,901 (31,038) 10,749 161,856 Tax lawsuits 26,291 5,673 (4,322) 1,170 28,812 Labor lawsuits 41,222 58,440 (12,940) 14,741 101,463 Environmental lawsuits 55,442 17,123 (11,716) (2,318) 58,531 Subtotal 1,201,142 325,657 (221,791) 252,645 1,557,653 Judicial deposits (43,494) (53,145) 10,855 (3,049) (88,833) Total 1,157,648 272,512 (210,936) 249,596 1,468,820

(b) Lawsuits with possible likelihood of loss

The ongoing civil, tax, labor and environmental proceedings at the administrative and judicial levels filed against the Company that are not accrued, are considered by management and its legal advisors and consultants of possible likelihood of loss, Contingent liabilities are as follows:

F-95 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) PARENT COMPANY AND CONSOLIDATED 2009 2008 Customer claims (i) 760,100 653,700 Supplier claims (ii) 501,500 388,100 Other civil claims (iii) 262,900 228,100 Tax lawsuits (iv) 280,700 259,000 Labor lawsuits (v) 100,300 115,600 Environmental lawsuits (vi) 44,300 25,200 Total 1,949,800 1,669,700

(i) Customer claims

Approximately 1,400 lawsuits were filed by commercial customers, which claim that their tariffs should be equal to the tariffs of another consumer category, and therefore claim the refund of the amounts collected by SABESP. The Company was granted both favorable and unfavorable final decisions at several courts, and recognized a provision when the likelihood of loss is considered probable. The change of R$123.7 million in the lawsuits classified as probable loss arose from the change in the likelihood of ongoing lawsuits, interest, fees and adjustments.

(ii) Supplier claims

Supplier claims were filed by building contractors. These lawsuits claim compensation claims and collection of alleged unpaid amounts arising from understatement of official inflation rates after the Real economic plan, and the economic and financial imbalance of the agreements. These lawsuits are in progress in different courts and a provision is recognized when the likelihood of loss is considered probable. The R$119.1 million and R$113.4 million increase in lawsuits whose likelihood of loss is considered probable and possible, respectively, is related to the change in the likelihood of the lawsuits, interest, fees and inclusion of monetary restatement.

(iii) Other civil claims

The Company is a party to several civil lawsuits related to indemnities for property damage, pain and suffering, and loss of profits allegedly caused to third parties. As of December 31, 2009, the total accrued amount of R$155.0 million (R$152.4 million in 2008) refers to claims with a loss likelihood considered probable. There was an increase both in lawsuits with probable and possible risk of loss, arising from the increase in lawsuits and the review of the expected outcomes, comprising monetary adjustment, interest and fees for the year.

(iv) Tax lawsuits

The provision for tax contingencies refers mainly to issues related to tax collections challenged due to differences in the interpretation of legislation by the Company’s legal advisors. (a) In 2006, the Federal Revenue Service, by means of a tax execution, audited the Company’s compliance with the tax obligations related to income tax and social contribution for calendar year 2001, and recognized taxes payable in the amount of R$341.1 million, adjusted through December 31,2009. The Company filed a timely objection and will appeal against the tax assessment at administrative level and in courts. According to its legal advisors, the likelihood of loss the of approximately 90% of this administrative proceeding is considered remote and 10% possible; (b) In 2005, the Federal Revenue Service partially rejected the offset request made by the Company for the extinction of the Corporate Income Tax (IRPJ) payable, in the amount of approximately R$56.1 million, and of the Social Contribution on Net Income (CSLL) payable, in the amount of approximately R$8.7 million, as of the determination period from January to April 2003, using prior year IRPJ and CSLL negative balances. In the final order, the authority did not ratify the equivalent of R$11.2 million related to IRPJ and R$0.7 million related to CSLL, totaling approximately R$11.9 million. The Company obtained a partially favorable decision in the filed objection appeals and, therefore, classified R$6.0 million as a possible loss and R$1.0 million as a probable loss; (c) The Federal Revenue Service rejected some offset requests made by the Company for the extinction of IRPJ/CSLL payable, using favorable amounts, arising from undue payments of IRPJ/CSLL, which were paid based on monthly estimates. The amount involved is estimated at R$37.9 million adjusted through December 31, 2009. Our legal advisors assessed it has a possible loss.

F-96 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) (d) The company filed for a preliminary injunction to challenge the revocation of the exemption from tax service granted by the City of São Paulo, under a City Law enacted in 2002. In April 2003, the exemption request was granted under an injunction determining the suspension of tax payments. In May 2005, the courts issued a decision overruling the injunction. In July 2005, SABESP filed an appeal to ensure the preliminary injunction granted remained in effect. There is no final decision on the lawsuit, and the likelihood of loss is considered possible. Concurrently, on September 18, 2006, the São Paulo Municipal Department of Finance issued a tax deficiency notice, against which the Company filed timely administrative objection, with subsequent rejection of the appeal filed with lower courts. The Company filed a timely ordinary appeal with the Municipal Tax Council which was not accepted and a writ of prevention was filed against this decision, with an injunction, for the purpose of annulling the decision. The amount involved is estimated at R$158.8 million, adjusted through December 31, 2009. Our legal advisors assessed it has a possible loss. (e) The Company filed lawsuits against the Municipalities of Bragança Paulista and São Paulo due to the collection of a charge on the use of public areas to install water and sewage networks used for the water supply and sewage services provided to these municipalities. In the lawsuit filed against the City of Bragança Paulista, the Company was granted a preliminary injunction related to this charge and preventing the municipality from collecting any current or future amounts related to such charge until there is a final decision on the merit of the lawsuit. In June 2005, the lower court decided favorably for the Company and the initial remedy was maintained. The municipality appealed against the decision, which is awaiting judgment by the Court of Appeals. As regards the lawsuit filed against the City of São Paulo, the lower court issued a decision confirming the legality of the municipal charge. The Company filed an appeal and awaits judgment. Subsequently, a new Law was approved to implement the collection of a charge on the use of public areas in the city of São Paulo. In April 2004, the Company filed for an injunction to suspend the collection of the municipal charge. The injunction was granted by the lower court and confirmed when the decision was issued, which recognizes the charge as undue. The municipality filed an appeal and is awaiting judgment by the Court of Justice. Our legal advisors assessed this risk as a possible loss.

(v) Labor lawsuits

The Company is a party to labor lawsuits, involving issues such as overtime, health hazard premium and hazardous duty premium, prior notice, change of function, salary equalization, and other. Part of the amount involved is in provisional or final execution at various court levels, and thus is classified as of probable loss and accordingly a provision was recognized.

On January 27, 2005, the São Paulo Water, Sewage and Environmental Workers’ Union (“Sintaema”) filed a lawsuit against the Company, as procedural substitute, claiming compensation for work shifts, which was dismissed by the lower court under Company arguments that Sintaema did not have legitimacy to file such lawsuit. However, the Labor Regional Court overruled this decision favorably to Sintaema and required that the lawsuit returned to the original court for judgment. The Company’s appeal to the Superior Labor Court was overruled. The lawsuit returned to the original court and was accepted. The Company appealed but the Labor Regional Court maintained the decision; we filed an appeal with the Superior Labor Court, for which we are awaiting judgment. Our legal advisors assess the likelihood of loss, totaling R$51.0 million, as probable.

(vi) Environmental lawsuits

The public civil actions to which we are party include the following: (a) Public civil action filed by the Public Prosecution Office against SABESP seeking to establish the obligation not to discharge sewage into the Cascavel river or other stream bed, in the municipality of Echaporã, subject to a daily fine of 200 minimum salaries and compensation for environmental damage, the amount of which shall be determined upon expert examination. The lower court decided unfavorably to the Company, based on an expert report, which presented estimated damages totaling R$352,000.00 in July 2000. The decision was maintained by the appellate court, and the Company is awaiting judgment by the higher courts. The amount related to the expert examination work plus the penalty fine totals R$12.2 million as of December 31, 2009. Our legal advisors’ assessed the likelihood of loss in probable. (b) Public civil action filed by the São Paulo Public Prosecution Office against us requesting the court to sentence the Company to: 1) terminate discharging untreated water effluents into the Capivari River and its tributaries, in the City of Campos do Jordão, within 540 days from the filing of the lawsuit, subject to a daily fine of R$100; and 2) Ensure the full environmental recovery due to environmental damage or monetary compensation in case the recovery is proven unfeasible. The

F-97 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) decision was unfavorable to SABESP, which filed an appeal. The court sustained the decision, and the fine in the event of noncompliance was changed in R$10. SABESP is awaiting ruling on the extraordinary appeal filed. The fine adjusted through December 31, 2009 corresponds to R$10.3 million; Our legal advisors’ assessed the likelihood of loss as probable. (c) Public civil action filed by the Public Prosecution Office against us and the City of Cotia seeking individual and joint sentencing of the defendants to: (i) the termination of untreated water effluents discharges into the Cotia River or its tributaries, subject to a daily fine in the case of noncompliance;(ii) the treatment of sewage prior to discharging it into the Cotia River, subject to a daily fine, in the event of noncompliance;(iii) the full restoration of soil, of surface and underground water bodies and of vegetation to their original condition, subject to a daily fine, in the event of noncompliance; and(iv) the payment of compensation for environmental damages caused to soil, to water sources and to underground and surface water bodies that cannot be recovered. The appellate court rendered favorable decisions to us with respect to items (i), (iii) and (iv) above. According to evaluations by the court’s technical expert, on October 17 2006, compensation for environmental damages was R$826,800.00 or, alternatively, R$5.8 million, if we include the damages caused to the river banks (Cotia river). This amount is still under discussion and its approval is subject to a final decision by a lower court. As of December 31, 2009, the restated amount of the expert’s report is R$7.5 million. Our legal advisors’ assessed the likelihood of loss as probable. (d) The São Paulo Public Prosecution Office filed a civil class action against SABESP and the City of Itatiba claiming the defendants to: 1) stop discharging in the environment untreated sewage collected in Itatiba, subject to a daily fine of R$10; 2) fully restore, within one year, the original soil, surface and underground water, and vegetation conditions contaminated by the sewage discharges contrary to environmental regulations, subject to a daily fine of R$10; 3) pay compensation, to be quantified by experts, for the damages caused to natural resources that can possibly not be recovered; 4) pay compensation not lower than R$2.0 million for pain and suffering caused to the community for the degradation of the environmental quality. This lawsuit is in its initial stage and is pending judgment from the lower court. As of December 31, 2009, the restated amount of this lawsuit is R$20.0 million. Our legal advisors assessed it has a possible loss; (e) Public civil action filed by the São Paulo Public Prosecution Office against SABESP and the City of Piracaia seeking conviction of the defendants for the obligation not to discharge untreated household sewage into the Atibaia river, which is not in compliance with the quality standards provided for in law, under the penalty of specific execution or a daily fine. This lawsuit is awaiting ruling at the lower courts. As of December 31, 2009, the restated amount of this lawsuit is R$9.0 million. Our legal advisors assessed it has a possible loss;

The Company is a party to other environmental lawsuits in municipalities where it operates, arising from the discharge of untreated waste, assessed as probable and possible risks of loss by its legal advisors. The amounts recognized as provisions do not always represent the final amount to be disbursed as indemnity of alleged damages, in view of the current stage in which the such lawsuits are and management’s ability to reasonably estimate the amounts of future disbursements. As of December 31, 2009, the total accrued amount represents the R$58.5 million (R$55,4 million in 2008), already including the amounts referred to in items (a), (b), and (c).

(vii) Settlements reached in 2009

In 2009 the Company reached several settlements related to environmental issues, as follows: (a) On January 15, 2009, Sabesp entered into a Policy Adjustment Commitment (“TAC”) with the Monte Mor District Attorney for the implementation in 35 months of the technical solution to startup the Sewage Treatment Plant in the Cardeal district, Elias Fausto, totaling R$1.7 million; (b) On May 25, 2009, SABESP reached a court settlement with the Municipal Governments of Campo Limpo Paulista, Várzea Paulista and Itupeva, and the Jundiaí District Attorney consisting of works in the Integrated Sewage System of Campo Limpo and Várzea Paulista, and in the Itupeva Sewage System, totaling an estimated amount of R$130.4 million, and recover forests, as compensation for possible damages to the environment, at an estimated cost of R$1,487 (current liabilities); (c) On July 31, 2009, SABESP reached a court settlement with the Cachoeira Paulista District Attorney for the performance of works in the household sewage diversion and treatment system of Cachoeira Paulista, and conduct an environmental restoration, as compensation, of possible damages to the environment. Total project costs are estimated at R$14 million and forest recovery is estimated at R$208 (noncurrent liabilities); (d) On August 06, 2009, SABESP reached a court settlement with the Queluz District Attorney for the performance of works in the household sewage diversion and treatment system of Queluz, and F-98 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) conduct an environmental restoration, as compensation, of possible damages to the environment. Total project costs are estimated at R$12.5 million and forest recovery is estimated at R$833 (noncurrent liabilities); (e) On October 27, 2009, SABESP reached a court settlement with the Paraguaçu Paulista District Attorney consisting of forest recovery in the municipality of Oscar Bressane, and the construction of the recyclable material disposal center. Total project costs are estimated at R$755 (noncurrent liabilities); (f) On October 15, 2009, SABESP reached a settlement with the Bananal District Attorney for the construction of the Sewage Treatment Plant in Arapeí. Total project costs are estimated at R$5.4 million; (g) On November 12, 2009, SABESP reached a court settlement with the Conchas District Attorney for the performance of works in the sewage diversion and treatment system of municipality of Anhembi and Pirambóia district. Total project costs are estimated at R$5.3 million; (h) On October 27, 2009, SABESP entered into a TAC with the Fernandópolis District Attorney for the construction of the Sewage Treatment Plant in Pedranópolis and the Santa Izabel do Marinheiro district. Total project costs are estimated at R$650; (i) On October 13, 2009, SABESP reached a court settlement with the Americana District Attorney for the construction of a sewage system in the urban area served by SABESP in the municipality of Hortolândia, and conduct an environmental recovery, as compensation, of possible damages to the environment. Total project costs are estimated at R$33.8 million and environmental recovery is estimated at R$357 (current liabilities); (j) On May 18, 2009, SABESP entered into a TAC with the Duartina District Attorney for the construction of a sewage system in the urban area served by SABESP in the municipality of Duartina. Total project costs are estimated at R$8.9 million;

(viii) Other concession-related legal proceedings

(a) In December 2, 1997, the municipality of Santos enacted a law expropriating our water and sewerage mains in Santos. We requested an injunction against the expropriation which was denied by the lower court. This decision was subsequently reversed by the State of São Paulo appellate court, which then issued an injunction suspending the law. The Company was granted a favorable decision at the lower court, and the municipality of Santos appealed against the decision. Although the decision was maintained by the Court of Justice, it is not final. Despite the pending action, the Company is operating the water supply and sewage collection systems in the municipality of Santos; (b) The municipality of Itapira revoked the concession contract and filed an Asset Repossession Action, the outcome of which was unfavorable to the Company. We appealed the decision, but in view of the compensation lawsuit filed against the aforementioned municipality we have waived the appeal. (c) The municipality of Tuiuti has brought a declaratory action seeking to recognize the inexistence of any judicial or legal grounds to justify our permanence as the provider of water supply and sewage collection services in the municipality of Tuiuti, and the subsequent taking over of these services by the municipality. We responded with a counterclaim against the municipality seeking a statement corroborating the existence of a legal relationship between the two parties for subsequent compensation for investments made. The lower court decision was partially unfavorable to us as it declared that there was no legal relationship between the City and SABESP relate to the service concession and confirmed the injunction authorizing the takeover of the services. However, the court’s decision was favorable to the counterclaim filed by SABESP and sentenced the City to pay R$541, restated from March 1996. We filed an appeal on July 22, 2009. On the other hand, the City also filed an appeal, both awaiting judgment by the State Appellate Court. SABESP is not operating in this municipality as required by th injunction granted to the City; (d) The municipality of Cajobi has filed a Repossession Action that seeks the takeover the water supply and sewage collection services, and sentencing us to pay for losses and damages for amounts received as water and sewage tariffs not received in view of utilities explored since the enactment of the Municipal Decree, and for the use of assets related to the concession. The court decision confirmed the City’s takeover of the water and sewage services. On August 25, 2008, we filed an appeal that awaits judgment. The City provides water supply and sewage collection services since May 29, 2007 under injunction granted in the interlocutory appeal. (e) The City of Araçoiaba da Serra filed a Repossession Action seeking an authorization to enter concession-related facilities, including all properties and chattels linked to the water supply and sewage treatment services. The City is now managing and operating these services in view of the F-99 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) termination of the concession agreement on September 23, 2006. The City also claims the definitive takeover of the services, including due handover of all assets, rights and privileges previously transferred to us. The initially granted injunction and confirmed by the appellate court maintain the City as the service provider. We have subsequently filed for an injunction to request the early production of evidence. The lawsuit is in the fact-finding phase.

As of December 31, 2009, the lawsuits filed by the Cities of Itapira, Cajobi, Monte Alto and Araçoiaba da Serra totaled approximately R$11.9 million and, based on our legal advisors’ assessment, the likelihood of loss in possible.

16. SHAREHOLDERS' EQUITY

(a) Authorized capital

The Company is authorized to increase capital by up to R$10,000,000, based on a Board of Directors’ resolution, after submission to the Supervisory Board.

(b) Subscribed and paid-in capital

Subscribed and paid-in capital is represented by 227,836,623 registered common shares, without par value, held as follows: Number of shares %

State Department of Finance 114,508,083 50.26 Companhia Brasileira de Liquidação e Custódia 54,052,476 23.72 The Bank Of New York ADR Department (equivalent in shares(*)) 58,641,584 25.74 Other 634,480 0.28 227,836,623 100.00

(*) each ADR is equal to 2 shares

Shareholders are entitled to a minimum mandatory dividend of 25% of the adjusted net income, calculated according to the Brazilian corporate law. The dividends do not bear interest and the amounts not claimed within three years from the date of the Shareholders’ Meeting that approved them mature in favor of the Company.

The mandatory minimum dividends are calculated as follows:

Net income for the year 1,373,879 (-) Legal reserve 5% 68,694 (-) Grants 12,994 Net income 1,292,191 Mandatory minimum dividend 323,048

In 2009, the Company determined interest on shareholders’ equity attributed to dividends in the amount of R$365,401 net of withholding income tax in the amount of R$28,756. In 2008, the amount was R$274,990 net of withholding income tax totaling R$21,198. Interest on own capital was calculated in conformity with Article 9 of Law 9249/95, at the Long-term Interest Rate (TJLP); this interest was originally recorded in ‘Financial expenses’ for income tax and social contribution deductibility purposes and subsequently, for presentation purposes, was reflected in ‘Shareholders’ equity’.

(d) Capital reserve

The capital reserve includes tax incentives and grants through 2007.

F-100 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) (e) Earnings reserves

(i) Allocation of net income for the year 2009 Net income for the year 1,373,879 (+) Realization of revaluation reserve 107,912 (-) Interest on own capital 394,157 (-) Legal reserve of 5% 68,694 1,018,940 (ii) Reserve for investments

Comprised specifically of own funds for expansion of water supply and sewage service systems.

17. INSURANCE COVERAGE

Insurance policies held by the Company provide the following coverage, taking into account the risks and nature of the related assets, as follows:

Insurance line Insured amount – R$ Premium (*) (*) Engineering risk 790,484 1,724 Fire 377,707 323 Civil liability – officers and employees 80,000 1,690 Civil liability – construction in progress 19,037 675 Civil liability – operations 3,000 167

(*) Unaudited information

The Company does not have an environmental and loss of profits insurance.

18. FINANCIAL INSTRUMENTS AND RISK

(a) Identification and valuation of financial instruments

The Company operates with many financial instruments, particularly cash and bank accounts, including financial investments, and loans and financing as described below.

In 2009 and 2008, the Company did not carry out transactions involving derivatives.

(i) Cash and cash equivalents, receivables, other current assets, and payables.

The amounts recorded approximate to their realizable values. Cash equivalents comprise highly liquid short-term investments denominated in Brazilian reais.

(ii) Investments

These refer mainly to the investment in Sesamm (as described in note 7), recorded using the equity method, in which the Company has a strategic interest. Considerations of fair value of the shares owned are not applicable.

(iii) Loans and financing

In compliance with CPC 14, the table below shows the fair values of projected cash flows of loans and financing discounted to present values, as of December 31, 2009.

F-101 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated)

2009 2008 Carrying Carrying amount Fair value amount Fair value Bank loans

Foreign currency (i) 1,749,798 2,446,340 2,280,983 2,984,782

Debentures (ii) 1,320,200 1,584,513 1,866,139 2,064,856 BNDES (iii) 272,685 272,685 202,245 202,245

Other (iv) 3,217,317 3,509,352 2,515,741 2,907,469

6,560,000 7,812,890 6,865,108 8,159,352

The fair value of the financial instruments was determined in accordance with the following criteria:

(i) Foreign currency-denominated financing is controlled in the original currency, translated at the exchange rate prevailing at balance sheet date, discounted to present value using the future market rate obtained from Bloomberg, based on the Company’s securities traded in the foreign market. In addition, the Company has an instrument denominated in yens (JICA, as mentioned in note 10), which was discounted to present value considering the yen-US dollar parity in addition to the assumptions described above.

(ii) Debentures are financing accounted for at their nominal value adjusted through the maturity date, discounted to present value at the future interest market rates, disclosed by Andima (National Association of Financial Market Institutions) in the secondary market, using the base date of December 31, 2009, and the Company’s securities are traded in the domestic market.

(iii) Financing – BNDES are instruments accounted for at their nominal value adjusted through the maturity date, subject to indexation to TJLP, which is of a particular type not compared to any other market rate. Accordingly, the Company opted to disclose the amount recorded as of December 31, 2009 as the fair value.

(iv) Other local currency financing are accounted for at their nominal value adjusted through the maturity date, discounted to present value at the future interest market rates. The future rates used were obtained from the website of BM&F (Brazilian Commodities and Futures Exchange).

(b) Market risk

(i) Currency risk

This risk arises from the possibility that the Company may incur losses due to exchange rate fluctuations, which would increase the liability balances of foreign currency-denominated loans and financing obtained in the market and the related financial expenses. The Company does not have hedges or swap transactions to hedge against this risk; however, it engages in the active management of the debt, as a way to reduce foreign currency exposure, using the windows of opportunities to replace expensive debts with cheap debts, settling the debts in advance to reduce cost.

A significant portion of the Company’s debt was denominated in US dollars and yens, totaling R$1,746,408 (note 10). The Company’s net exposure to currency risks as of December 31, 2009 is summarized as follows:

F-102 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated)

PARENT COMPANY AND CONSOLIDATED In thousands US$ Yen Loans and financing 764,647 21,316,000

(ii) Interest rate risk

This risk arises from the possibility that the Company could incur losses due to fluctuations in interest rates, increasing the financial expenses related to loans and financing. The Company has not entered into any derivative contract to hedge against this risk; however, it continually monitors market interest rates, in order to evaluate the possible need to replace its debt. As of December 31, 2009, the Company has R$1,599,382 in loans and financing which were obtained at variable interest rates (CDI and TJLP).

Another risk to which the Company is exposed, is the mismatch of the monetary restatement indices of its debt with those of its receivables. Water supply and sewage treatment tariffs do not necessarily follow the increases in the interest rates affecting the Company’s debt.

(iii) Credit risk

Credit risk is mitigated by sales to a geographically dispersed customer base.

The table below presents the sensitivity analysis of the financial instruments which may have significant impact on the Company.

As prescribed by CVM Instruction 475/08, this table shows the balances of the main financial liabilities converted at a projected rate for the final settlement of each agreement, measured at fair value (Scenario I), with a 25% appreciation (Scenario II), and a 50% appreciation (Scenario III). 2009

Financial instruments Risk Scenario I Scenario II Scenario III R$ R$ R$

Financial liability Loans and financing

Banco do Brasil, CEF UPR increase 1,054,679 1,061,304 1,067,929

Debentures IGPM increase 708,330 885,412 1,062,495

Debentures IPCA increase 125,272 156,591 187,909

BID and EUROBONDS US$ appreciation 705,341 881,677 1,058,012

JICA Yen appreciation 162,344 202,931 243,517

The indices used for each one of the scenarios above is based on the remaining number of days of each agreement before maturity; amounts have been summarized.

Rates were projected based on the final settlement dates of each financial instrumento; information was obtained on BM&F’s website.

The purpose of this sensitivity analysis is to measure the impact of the changes in market variables on the Company’s financial instruments. The settlement of these amounts may result in amounts that differ from those presented above due to the estimates used in the process of their determination.

F-103 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) 19. OPERATING REVENUE PARENT COMPANY AND CONSOLIDATED 2009 2008

Greater São Paulo Metropolitan Area 5,471,595 5,207,678 Regional systems (i) 1,764,623 1,631,125 Total 7,236,218 6,838,803

(i) Comprises municipalities operated in São Paulo State inland and coastal regions.

20. OPERATING COSTS AND EXPENSES PARENT COMPANY CONSOLIDATED 2009 2008 2009 2008 Cost of sales and services: Salaries and related taxes 1,179,603 1,027,527 1,179,603 1,027,527 General supplies 142,154 135,814 142,154 135,814 Treatment supplies 136,722 133,154 136,722 133,154 Outsourced services 552,708 443,973 552,708 443,973 Electricity 483,675 457,740 483,675 457,740 General expenses 45,099 36,400 45,099 36,400 Depreciation and amortization 536,312 597,201 536,312 597,201 3,076,273 2,831,809 3,076,273 2,831,809 Selling expenses: Salaries and related taxes 211,804 179,197 211,804 179,197 General supplies 7,600 6,159 7,600 6,159 Outsourced services 204,235 131,921 204,235 131,921 Electricity 739 751 739 751 General expenses 63,474 60,782 63,474 60,782 Depreciation and amortization 5,219 3,875 5,219 3,875 Allowance for doubtful accounts, net of 308,188 336,264 308,188 336,264 recoveries 801,259 718,949 801,259 718,949 Administrative expenses: Salaries and related taxes 167,239 147,034 167,506 147,087 General supplies 6,201 4,579 6,211 4,581 Outsourced services 154,154 112,663 154,341 112,720 Electricity 1,043 1,098 1,043 1,099 General expenses 268,937 247,802 268,971 247,819 Depreciation and amortization 19,155 16,728 19,158 16,728 Tax expenses 55,013 48,554 55,018 48,562 671,742 578,458 672,248 578,596

Costs, and selling and administrative expenses: Salaries and related taxes 1,558,646 1,353,758 1,558,913 1,353,811 General supplies 155,955 146,552 155,965 146,554 Treatment supplies 136,722 133,154 136,722 133,154 Outsourced services 911,097 688,557 911,284 688,614 Electricity 485,457 459,589 485,457 459,590 General expenses 377,510 344,984 377,544 345,001 Depreciation and amortization 560,686 617,804 560,689 617,804 Tax expenses 55,013 48,554 55,018 48,562

Allowance for doubtful accounts, net of 308,188 336,264 308,188 336,264 recoveries (notes 4 (c(ii)) and 5(a)(v)) 4,549,274 4,129,216 4,549,780 4,129,354 Financial expenses: Interest and charges on loans and financing - 390,810 423,245 390,810 423,245 local currency Interest and charges on loans and financing - 61,852 71,344 61,852 71,344 foreign currency Interest on capital (note 16(c)) 394,157 296,188 394,157 296,188 Interest on own capital (reversal) (394,157) (296,188) (394,157) (296,188) F-104 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) PARENT COMPANY CONSOLIDATED 2009 2008 2009 2008 Other financial expenses 92,788 26,212 92,793 26,212 Income tax on remittance abroad 3,552 5,019 3,552 5,019 Inflation adjustment on loans and financing 1,356 127,938 1,356 127,938

Other inflation adjustments 22,481 20,512 22,481 20,512 Reserve for financial contingencies 252,645 165,130 252,645 165,130 825,484 839,400 825,489 839,400

Financial income: Inflation gains 62,964 420,374 62,964 420,374 Income on short-term investments 73,927 62,179 74,220 62,301 Interest and other 89,598 88,057 89,598 88,064 226,489 570,610 226,782 570,739 Financial expenses, net 598,995 268,790 598,707 268,661 Foreign exchange change, net: Foreign exchange change on loans and (403,694) 436,157 (403,694) 436,157 financing Other foreign exchange change 1,028 - 1,028 - Foreign exchange gains 7,297 2,712 7,297 2,712

(395,369) 438,869 (395,369) 438,869

The consolidated balance includes administrative expenses, totaling R$506 (2008 – R$138) and financial income totaling R$288 (2008 – R$129).

21. OTHER OPERATING EXPENSES, NET

The breakdown of ‘Other operating expenses, net’ is as follows:

PARENT COMPANY AND CONSOLIDATED 2009 2008

Other operating income 55,689 70,280 COFINS and PASEP (4,276) (5,306) 51,413 64,974 Other operating expenses (90,913) (1,117,958)

OTHER OPERATING EXPENSES, NET (39,500) (1,052,984)

Other operating income is comprised of sale of property, plant and equipment, sale of contracts awarded in public bids, and indemnities and reimbursement of expenses, fines and collateral, property leases, reuse water, Pura and Aqualog projects and services.

Other operating expenses consist mainly of: (i) write-off of property, plant and equipment due to obsolescence, discontinued construction works, unproductive wells, projects considered economically unfeasible, and losses on property, plant and equipment and (ii) the allowance for loss of the “disputed” reimbursements of the benefits and the reserve for the actuarial obligation required by State Law 4,819/58 (note 5 (vii)).

F-105 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) 22. OPERATING SEGMENTS

The Company reports two identifiable segments: (i) water supply systems; and (ii) sewage collection systems. PARENT COMPANY AND CONSOLIDATED

2009 2008 DESCRIPTION WATER SEWAGE TOTAL WATER SEWAGE TOTAL

Gross revenue from sales and services - retail 3,690,723 3,069,797 6,760,520 3,503,643 2,891,036 6,394,679 Gross revenue from sales - bulk 332,975 21,925 354,900 314,952 16,606 331,558 Other income and services rendered 80,634 40,164 120,798 74,547 38,019 112,566 Gross revenue from sales and services 4,104,332 3,131,886 7,236,218 3,893,142 2,945,661 6,838,803

Gross sales deductions (286,813) (218,858) (505,671) (277,310) (209,821) (487,131)

Net revenue from sales and services 3,817,519 2,913,028 6,730,547 3,615,832 2,735,840 6,351,672

Costs, and selling and administrative expenses (3,015,724) (1,533,549) (4,549,273) (2,717,310) (1,411,906) (4,129,216)

Income from operations before other operating expenses, net 801,795 1,379,479 2,181,274 898,522 1,323,934 2,222,456

Other operating expenses, net (39,500) (1,052,984) Income from operations before equity in subsidiary, financial income (expenses), and taxes 2,141,774 1,169,472

The consolidated balance of income from operations before the equity in share os results os investee totals R$2,141,268 (2008 - R$1,169,334), and the difference of R$506 (2008 – R$138) is mainly represented by administrative expenses, as Sesamm was in the pre-operating stage as of December 31, 2009.

23. MANAGEMENT FEES

SABESP’s compensation policy for directors and officers is set out according to guidelines of the São Paulo State Government, the CODEC (State Capital protection Board), and are based on performance, market competitiveness, or other indicators related to the Company’s business, and is subject to approval by shareholders at an Annual Shareholders' Meeting.

Officers’ compensation is limited to the compensation of the State Governor, and the Board of Directors’ compensation is equivalent to 30 percent of the executive committee’ overall compensation, contingent on attendance of at least one monthly meeting.

The objective of the compensation policy is to set a private sector management paradigm to retain its staff and recruit competent, experienced and motivated professionals, considering the level of management efficiency currently required by the Company.

In addition to monthly fee, the members of the Board of Directors and the Executive Committee receive:

Bonuses

F-106 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated)

For the purposes of compensating directors and officers of the companies where the State is the controlling shareholder, as an incentive policy, providing the company records quarterly, half-yearly, and yearly profits, and distributes mandatory dividends to shareholders, even if in the form of interest on own capital. Annual bonuses cannot exceed the lower of six times the monthly compensation of the officers/directors nor 10 percent of the interest on own capital paid by the company.

Annual award: equivalent to a monthly fee, calculated on a prorated basis in December of each year.

The purpose of this award is to correspond to the thirteenth salary paid to Company employees, as officers and directors’ relationship with the Company is govern by its bylaws and not the labor code.

Benefits: paid only to officers – meal ticket, basket of food staples, medical care, weekly paid rest typified as a paid leave of 30 calendar days, and payment of a premium equivalent to one third of the monthly fee.

The compensation paid by the Company to the members of its board of directors and officers amounted to R$2,606 and R$2,444 for the years ended December 31, 2009 and 2008, respectively. An additional amount of R$856, related to the bonus program, was accrued in the period from January to December 2009.

24. COMMITMENTS

(i) Rentals

Operating, administrative and property leases already contracted require the following minimum payments, as follows:

2010 7,445 2011 3,555 2012 947 TOTAL 11,947

Lease expenses for the years ended December 31, 2009 and 2008 were R$9,432 and R$8,516, respectively. Lease expenses refer to the following: property rentals, machinery and equipment leases, IT equipment leases, and photocopier leases.

(ii) Firm demand contracts

The Company has entered into long-term contracts with electric power providers. The main amounts regarding this type of contracts are presented as follows:

2010 215,242 2011 156,794 2012 128,965 2013 8,000 2014 369 2015 52 TOTAL 509,422

Electric power expenses for the years ended December 31, 2009 and 2008 were R$485,766 and R$459,880, respectively. The amount of R$485,766 (R$459,880 in 2008) was recorded in expenses and of R$310 (R$291 in 2008) in investments.

25. CONTRACTS WITH THE CITY OF SÃO PAULO

On November 14, 2007, the Company and the City of São Paulo (the Parties) entered into an Agreement to establish the conditions that ensure the stability in the provision of water supply and sewage, and environmental utility services in the city of São Paulo, the main provisions of which are as follows:

F-107 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) 1. The Parties made the commitment to take basic sanitation and environmental actions, complementary to the actions of the Municipality of São Paulo, by investing in the deployment and continuity of programs such as: Programa Córrego Limpo (Clean River Program) and Programa de Uso Racional da Água – PURA (Rational Water Use Program), the purpose of which is to ensure a decrease in water consumption by City government units, ensuring water supply to and the quality of living of the population;

2. Starting November 14, 2007, all the amounts paid by the City of São Paulo to SABESP, referring to consumption by City departments, agencies, and foundations, net of taxes, will be used in basic sanitation and environmental actions in the municipality;

3. The City made the commitment to resume the payment of consumption bills issued by SABESP, starting November 14, 2007;

On February 11, 2008, the Parties signed the First Amendment to the Agreement with the City of São Paulo. The Parties decided to extend the agreement for a period equal to the original period, so that the Parties may conclude the required understandings to settle the outstanding debts and prepare the drafts of the Arrangement, Contract Program, and the Authorization Act;

On May 9, 2008, the Parties signed the Second Amendment to the Agreement with the Municipality of São Paulo extending the term for an equal period and providing for automatic renewals, for equal periods, should the parties do not express otherwise;

On August 29, 2008, the City of São Paulo submitted Bill 558/08 to the São Paulo City Council. The approval of this municipal Law will authorize the Cooperation Agreement and Metropolitan Program Contract between the Executive branch and the São Paulo State, São Paulo State Sanitation and Power Regulatory Agency (ARSESP) and SABESP;

On December 22, 2008, the Parties signed the Third Amendment to the Agreement and decided to: i – change the payment term of the debt balance of the municipality in favor of SABESP, after matching the accounts; ii – adopt the same criterion that will be used by SABESP to calculate the adjustment to present value of the credit balance for SABESP in order to deflate the contract discount agreed in the Agreement; iii – include a clause authorizing SABESP to carry out expropriations. Also in December 2008, the Municipal Bill 558/08 was approved in the first vote;

In March 2009, the São Paulo City Council held a Public Hearing to discuss City Bill 558/08;

On June 18, 2009, the Municipal Government passed Law 14934, enacted during the City Council session of June 3, 2009, which approved Bill 558/08.

The Fourth Amendment to the Agreement was signed on August 6, 2009 and includes the basic environmental sanitation, the channeling of the CEU Uirapuru, Curtume and Tiburtino streams.

On February 8, 2010, there was a Public Hearing to discuss the presentation of the Municipal Basic Sanitation Plan and the Arrangement to be entered into by the State of São Paulo and the City of São Paulo, with the intermediation and consent of ARSESP and SABESP;

On March 10, 2010, there was a Public Hearing to discuss the presentation of the Water and Sewage Utility Agreement to be entered into by the State of São Paulo and the City of São Paulo, with the intermediation and consent of ARSESP and SABESP;

Currently, the State, the City and SABESP are working to finish the necessary adjustments to the aforementioned instruments.

26. SUBSEQUENT EVENTS

(a) 11th Issue of Debentures

The 11th Issue of Company simple debentures is being structured. As required by CVM Instruction 471, August 8, 2008, we filed with ANDIMA (National Association of Financial and Capital Market Institutions) on February 22, 2010 for prior analysis the registration of the public offering of the 11th Issue of Debentures (“11th Issue”) totaling R$900,000,000.00, in two series, where series 1 totals R$600,000,000.00 and matures in five (5) years, and series 2 totals R$300,000,000.00 and matures in three (3) years. The 11th Issue will be registered with the CVM, and will, therefore, be subject to market conditions for public distribution purposes.

F-108 COMPANHIA DE SANEAMENTO BÁSICO DO State of SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the years ended December 31, 2009 and 2008 (In thousands of Brazilian reais - R$, unless otherwise stated) (b) Gesp Agreement

As mentioned in note 5 and as part of the actions intended to recover the receivables that management considers due by the State Government, related to discrepancies in the reimbursement of the pension benefits paid by the Company, whose accrued amount is R$471,591 and the related reserve for the actuarial liability totals R$518,027 as of December 31, 2009, on March 24, 2010 SABESP reported to the controlling shareholder the official letter approved by the executive committee, proposing that the matter be solved by São Paulo Stock Exchange (Bovespa) Arbitration Chamber.

F-109 (A free translation of the original in Portuguese)

Report of Independent Auditors

To the Board of Directors and Stockholders Companhia de Saneamento Básico do Estado de São Paulo - SABESP

1 We have audited the accompanying balance sheet of Companhia de Saneamento Básico do Estado de São Paulo - SABESP ("the Company") and the consolidated balance sheet of Companhia de Saneamento Básico do Estado de São Paulo - SABESP and its subsidiary at December 31, 2008 and the related statements of income, of changes in stockholders’ equity, of cash flows and of value added of the Company and the related consolidated statements of income, of cash flows and of value added for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements.

2 We conducted our audit in accordance with approved Brazilian auditing standards, which require that we perform the audit to obtain reasonable assurance about whether the financial statements are fairly presented in all material respects. Accordingly, our work included, among other procedures: (a) planning our audit taking into consideration the significance of balances, the volume of transactions and the accounting and internal control systems of the Company, (b) examining, on a test basis, evidence and records supporting the amounts and disclosures in the financial statements, and (c) assessing the accounting practices used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

3 In our opinion, the financial statements audited by us present fairly, in all material respects, the financial position of Companhia de Saneamento Básico do Estado de São Paulo - SABESP and of Companhia de Saneamento Básico do Estado de São Paulo - SABESP and its subsidiary at December 31, 2008 and the results of its operations, the changes in stockholders’ equity, its cash flows and the value added, and the consolidated results of operations, cash flows and consolidated value added for the year then ended, in accordance with accounting practices adopted in Brazil.

4 As mentioned in Note 7, the Company and the Government of the State of São Paulo entered into an agreement to settle the so-called uncontroversial amount, referring to the reimbursement of the supplement of retirement and pension plans paid by the Company,

F-110 Companhia de Saneamento Básico do Estado de São Paulo - SABESP

in the name and on account of the Government of the State of São Paulo. The realization of this asset may eventually be influenced by: (a) the resolution of legal uncertainties caused by public action and legislative authorization related to the transfer of reservoirs to the Company, amounting to R$ 696,283 thousand and (b) the financial collection of other amounts, amounting to R$ 260,310 thousand.

5 As mentioned in Note 27, some agreements were signed between the Municipality of São Paulo and the Company, in relation to the resolution of outstanding debts to ensure stability in the provision of services and the establishment of certain sanitation actions. In view of the current stage of the negotiations between the Company and the Municipality of São Paulo, management understands that no adjustment will be necessary to the corresponding amounts recorded in the financial statements. Therefore, no adjustment has been made in the financial statements

6 The audit of the financial statements of the parent company for the year ended December 31, 2007, presented for comparison purposes, was conducted by other independent auditors who issued an unqualified opinion dated March 26, 2009 with respect to Note 3 and March 27, 2008, with respect to the remainder of the report. That opinion included additional paragraphs emphasizing the following matters: (i) the reimbursement of amounts paid by the Company relating to supplementary retirement and pension plans ; (ii) the agreement executed between the Municipality of São Paulo and the Company; and (iii) the description in Note 3 relating to the changes in the accounting practices adopted in Brazil during 2008, which lead to the adjustment and restatement of the balance sheet as of December 31, 2007 of the parent company and the corresponding statements of operations, of changes in stockholders' equity, of cash flows, and of value added, corresponding to the year then ended in accordance with Technical Pronouncement No. 12 of the Brazilian Accounting Pronouncements Committee (CPC) - "Accounting Practices, Changes in Accounting Estimates and Correction of Errors".

7 As described in Note 2 to the financial statements, the balance sheet as of December 31, 2008 and the related statements of income, of changes in stockholders’ equity, of cash flows and of value added for the year ended December 31, 2008 were adjusted with relation to the those previously presented. In view of these changes, we are reissuing this report, which replaces the qualified opinion dated March 26, 2009.

F-111 Companhia de Saneamento Básico do Estado de São Paulo - SABESP

São Paulo, January 27, 2010

PricewaterhouseCoopers Auditores Independentes CRC 2SP000160/O-5

Paulo Cesar Estevão Netto Contador CRC 1RJ026365/O-8 "T" SP

F-112 (Convenience Translation into English from the Original Previously Issued in Portuguese)

INDEPENDENT AUDITORS’ REPORT

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

1. We have audited the accompanying balance sheet of Companhia de Saneamento Básico do Estado de São Paulo - SABESP (the “Company”) as of December 31, 2007, and the related statements of income, changes in shareholders’ equity, cash flows, and value added for the year then ended, all expressed in Brazilian reais and prepared under the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements.

2. Our audit was conducted in accordance with auditing standards in Brazil and comprised: (a) planning of the work, taking into consideration the significance of the balances, volume of transactions, and the accounting and internal control systems of the Company; (b) checking, on a test basis, evidences and records that support the amounts and accounting information disclosed; and (c) evaluating the significant accounting practices and estimates adopted by the Company’s management, as well as the presentation of the consolidated financial statements taken as a whole.

3. In our opinion, the financial statements referred to in paragraph 1 present fairly, in all material respects, the financial position of Companhia de Saneamento Básico do Estado de São Paulo - SABESP as of December 31, 2007, and the results of its operations, the changes in shareholders’ equity, its cash flows, and the value added for the year then ended, in conformity with Brazilian accounting practices.

4. As mentioned in note 7 to the financial statements, the Company is negotiating with the São Paulo State Government the reimbursement of the amounts for the supplementary retirement and pension paid by the Company.

F-113 5. As mentioned in note 27 to the financial statements, on November 14, 2007 the Company and the City of São Paulo entered into an arrangement seeking stability in the provision of services in the City of São Paulo as well as the implementation of sanitation and environmental actions supplementary to the actions taken by the City.

6. As described in note 3 to the financial statements, in view of the changes in Brazilian accounting practices in 2008, the balance sheet as of December 31, 2007 and the related statements of income, changes in shareholders' equity, cash flows, and value added for the year then ended have been adjusted and are being restated as required by Accounting Standard and Procedure (NPC) 12 Accounting Policies, Changes in Accounting Estimates and Errors.

7. The accompanying financial statements have been translated into English for the convenience of readers outside Brazil.

São Paulo, March 27, 2008, except note 3 to the financial statements, dated March 26, 2009

DELOITTE TOUCHE TOHMATSU Marco Antonio Brandão Simurro Auditores Independentes Engagement Partner

F-114 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP BALANCE SHEETS AS OF DECEMBER 31, 2008 and 2007

(In thousands of Brazilian reais - R$, unless otherwise stated) Note Company Consolidated Note Company Consolidated 2008 2007 2008 2008 2007 2008 Assets (Adjusted, note 2) (Adjusted, note 2) Liabilities and shareholders' equity (Adjusted, note 2) (Adjusted, note 2)

Current assets Current liabilities Cash and cash equivalents 5 622.059 464.997 625.732 Contractors and suppliers 187.139 165.267 187.143 Trade accounts receivable 6 1.129.746 1.207.885 1.129.746 Loans and financing 12 1.448.860 742.114 1.448.860 Related-party balances and transactions 7 210.131 338.506 210.131 Payroll, accruals and payroll Inventories 47.678 53.141 47.678 payroll charges 196.056 166.797 196.075 Recoverable taxes 4.665 9.414 4.665 Taxes payable 14 130.409 127.735 130.410 Other receivables 49.478 41.782 49.478 Deferred taxes 13(a) 64.369 75.249 64.369 Deferred income tax and Interest on capital payable 18 275.007 680.339 275.007 social contribution 13 170.982 108.792 170.982 Reserves for contingencies 17 459.395 290.172 459.395 Total current assets 2.234.739 2.224.517 2.238.412 Accounts payable 198.511 156.987 198.511 Other payables 57.149 50.077 57.149 Total current liabilities 3.016.895 2.454.737 3.016.919

Noncurrent liabilities Noncurrent assets Long-term payables: Long-term receivables: Loans and financing 12 5.416.248 4.943.121 5.416.248 Trade accounts receivable 6 326.472 278.787 326.472 Taxes payable 14 114.210 197.635 114.210 Related-party balances and transactions 7 980.756 986.988 980.756 Deferred taxes 13 141.492 159.865 141.492 Indemnities receivable 8 148.794 148.794 148.794 Reserves for contingencies 17 698.253 655.084 698.253 Judicial deposits 49.127 19.806 49.127 Reserves for actuarial liability - Law 481 15 535.435 - 535.435 Other receivables 192.257 75.202 192.257 Pension plan obligations 15 419.871 365.234 419.871 Deferred income tax and Other payables 223.568 103.694 223.568 social contribution 13 435.341 357.226 435.341 Total noncurrent liabilities 7.549.077 6.424.633 7.549.077 2.132.747 1.866.803 2.132.747 Shareholders' equity Investments 9 4.552 720 720 Capital 6.203.688 3.403.688 6.203.688 Property, plant and equipment 10 14.926.433 14.051.368 14.926.616 Capital reserve 124.255 124.255 124.255 Intangible assets 11 815.416 516.494 815.416 Revaluation reserve 2.253.012 2.339.829 2.253.012 15.746.401 14.568.582 15.742.752 Earnings reserves 18 966.960 3.912.760 966.960 Total noncurrent assets 17.879.148 16.435.385 17.875.499 Total shareholders' equity 9.547.915 9.780.532 9.547.915

TOTAL LIABILITIES AND TOTAL ASSETS 20.113.887 18.659.902 20.113.911 20.113.887 18.659.902 20.113.911 SHAREHOLDERS' EQUITY

The accompanying notes are an integral part of these financial statements

F-115 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP STATEMENTS OF INCOME For the Years Ended December 31, 2008 and 2007 (In thousands of Brazilian reais - R$, unless otherwise stated)

COMPANY CONSOLIDATED 2008 2007 2008 Note (Adjusted, note 2) (Adjusted, note 2) GROSS REVENUE FROM SALES AND SERVICES 21 6,838,803 6,448,211 6,838,803 Gross sales deductions (487,131) (477,369) (487,131) NET REVENUE FROM SALES AND SERVICES 6,351,672 5,970,842 6,351,672

COST OF SALES AND SERVICES 22 (2,831,809) (2,695,696) (2,831,809) GROSS PROFIT 3,519,863 3,275,146 3,519,863 OPERATING EXPENSES Selling 22 (718,949) (639,552) (718,949) Administrative 22 (578,458) (552,629) (578,596) Other operating expenses, net 23 (1,052,984) (35,176) (1,052,984) INCOME FROM OPERATIONS BEFORE EQUITY IN SUBSIDIARY, FINANCIAL INCOME (EXPENSES), AND TAXES 1,169,472 2,047,789 1,169,334 PROFIT SHARING Equity in subsidiary (9) - - INCOME BEFORE FINANCIAL INCOME (EXPENSES) NET 1,169,463 2,047,789 1,169,334 Financial income, net 22 (268,790) (748,995) (268,661) Exchange variations, net 22 (438,869) 188,038 (438,869) INCOME BEFORE INCOME TAX AND SOCIAL CONTRIBUTION 461,804 1,486,832 461,804 INCOME TAX AND SOCIAL CONTRIBUTION Current 13(c) (548,373) (543,345) (548,373) Deferred 13(c) 150,140 111,777 150,140

NET INCOME FOR THE YEAR 63,571 1,055,264 63,571

Earnings per share in R$ 18(b) 0.28 4.63 0.28 The accompanying notes are an integral part of these financial statements.

F-116 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY For the Years Ended December 31, 2008 and 2007 (In thousands of Brazilian reais - R$, unless otherwise stated)

Earnings reserves Retained earnings Capital Revaluation Legal Reserve for (accumulated Note Capital reserve reserve reserve investments losses) TOTAL BALANCES AS OF DECEMBER 31, 2006 3,403,688 106,690 2,427,499 254,219 2,826,386 - 9,018,482 Adjustment under Law 11638/07 3 - - - - - (10,035) (10,035)

BALANCES AS OF DECEMBER 31, 2006 (adjusted) 3,403,688 106,690 2,427,499 254,219 2,826,386 (10,035) 9,008,447 Net income for the year - - - - - 1,048,703 1,048,703 Adjustment under Law 11638/07 3 - - - - - 6,561 6,561 Adjusted net income for the year - - - - - 1,055,264 1,055,264 Donations - 17,565 - - - - 17,565 Realization of revaluation reserve 10(h) - - (87,670) - - 87,670 - Legal reserve 18(e(i)) - - - 52,435 - (52,435) - Interest on capital (R$1.32 per share) 18(c) - - - - - (300,744) (300,744) Reserve for investments 18(e(ii)) - - - - 783,194 (783,194) -

BALANCES AS OF DECEMBER 31, 2007 (Adjusted) 3,403,688 124,255 2,339,829 306,654 3,609,580 (3,474) 9,780,532

Absorption of accumulated losses generated by adjustments under Law 11638/07 - - - - (3,474) 3,474 - Net income for the year - - - - - 63,571 63,571 Capitalization of reserves 2,800,000 - - - (2,800,000) - - Realization of revaluation reserve 10(h) - - (86,817) - - 86,817 - Legal reserve 18(e(i)) - - - 3,178 - (3,178) - Interest on capital (R$1.30 per share) 18(c) - - - - - (296,188) (296,188) Absorption of accumulated losses with reserve for 18(e(ii)) - - - - (148,978) 148,978 - investments

BALANCES AS OF DECEMBER 31, 2008 6,203,688 124,255 2,253,012 309,832 657,128 - 9,547,915 The accompanying notes are an integral part of these financial statements

F-117 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2008 and 2007 (In thousands of Brazilian reais - R$, unless otherwise stated) NoteCOMPANY AND CONSOLIDATED CONSOLIDATED 2008 2007 2008 (Adjusted, note 2) (Adjusted) (Adjusted, note 2) Cash flows from operating activities Net income for the year 63.571 1.055.264 63.571 Adjustments to reconcile net income: Deferred taxes and contributions (152.313) (104.432) (152.313) Taxes and contributions payable (68.878) - (68.878) Reserves for contingencies 461.654 477.722 461.654 Reserves for actuarial liability - Law 4819/58 535.435 - 535.435 Allowance for losses on disputed amounts of Law 4819/58 409.079 - 409.079 Reversal of allowance for losses (366) (945) (366) Other provisions (492) 155 (492) Pension plan obligations 71.704 59.931 71.704 Disposal of property, plant and equipment 10(b) 157.978 68.349 157.978 Disposal of deferred charges 611 1.276 611 Gain on sale of property, plant and equipment - 219 - Depreciation and amortization 22 617.804 615.988 617.804 Interest on loans and financing payable 499.590 519.672 499.590 Monetary and exchange variations on loans and financing 22 564.095 (87.101) 564.095 Monetary variation on interest on capital 7.338 4.462 7.338 Interest and monetary variation losses 14 8.281 12.218 8.281 Interest and monetary variation gains (368.806) (21.121) (368.806) Allowance for doubtful accounts 6(c(ii) and 22 336.264 323.339 336.264 Equity in subsidiary 9 - - Adjusted net income 3.142.558 2.924.996 3.142.549 Changes in assets Trade accounts receivable (301.844) (400.944) (301.844) Related-party balances and transactions 82.956 (81.741) 82.956 Inventories 5.829 (3.307) 5.829 Recoverable taxes 4.749 22.168 4.749 Other receivables (112.111) (22.877) (112.111) Judicial deposits (37.933) 9.706 (37.933)

Changes in liabilities Contractors and suppliers (17.986) (14.055) (17.982) Payroll, accruals and payroll charges 29.259 (10.908) 29.275 Taxes payable (37.399) (22.840) (37.395) Accounts payable 6.216 4.034 6.216 Other payables 16.321 (27.055) 16.321 Contingencies (235.573) (145.668) (235.573) Pension fund (17.067) (15.909) (17.067) Changes in assets and liabilities (614.583) (709.396) (614.559)

Net cash provided by operating activities 2.527.975 2.215.600 2.527.990

Cash flows from investing activities Purchase of property, plant and equipment (1.395.458) (848.878) (1.395.641) Increase in intangible assets (159.514) (32.818) (159.514) Increase in investments (3.841) - -

Net cash used in investing activities (1.558.813) (881.696) (1.555.155)

Cash flows from financing activities

Loans and financing – noncurrent Borrowings 1.043.174 222.474 1.043.174 Repayments (1.146.416) (1.283.201) (1.146.416)

Payment of interest on capital (708.858) (136.386) (708.858)

Net cash used in financing activities (812.100) (1.197.113) (812.100)

Increase in cash and cash equivalents 157.062 136.791 160.735

Cash and cash equivalents at beginning of year 5 464.997 328.206 464.997 Cash and cash equivalents at end of year 5 622.059 464.997 625.732

Changes in cash and cash equivalents 157.062 136.791 160.735

Supplemental information on cash flows: Interest and taxes paid on loans and financing 516.887 548.417 516.887 Capitalization of interest and financial charges 10(c) 219.430 (13.338) 219.430 Income tax and social contribution paid 502.404 499.318 502.404 COFINS and PASEP paid 515.659 472.060 515.659 Program contract commitments 11(c(ii)) 146.426 34.071 146.426 Purchase of property, plant and equipment payable 39.858 35.154 39.858 National Water Agency Program - 16.219 -

The accompanying notes are an integral part of these financial statements

F-118 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP STATEMENTS OF VALUE ADDED For the Years Ended December 31, 2008 and 2007

(In thousands of Brazilian reais - R$, unless otherwise stated)

COMPANY CONSOLIDATED 2008 2007 2008 Note (Adjusted, note 2) (Adjusted, note 2) Revenues Sales of products and services 21 6,838,803 6,448,211 6,838,803 Other income 23 70,280 52,633 70,280 Income related to construction of own assets 356,600 90,588 356,600 Allowance for doubtful accounts - set up 6(c(ii)) (336,264) (323,339) (336,264) 6,929,419 6,268,093 6,929,419 Inputs purchased from third parties Cost of sales and services (1,180,116) (1,099,897) (1,180,116) Materials, electricity, outsourced services, and other (589,851) (519,350) (589,925) Other operating expenses 23 (1,117,958) (81,291) (1,117,958) (2,887,925) (1,700,538) (2,887,999) Gross value added 4,041,494 4,567,555 4,041,420 Retentions Depreciation and amortization (618,924) (617,341) (618,924)

Wealth created by the Company 3,422,570 3,950,214 3,422,496

Wealth received in transfer Equity in subsidiary (9) - - Financial income 22 567,898 132,123 568,027 567,889 132,123 568,027 Wealth for distribution 3,990,459 4,082,337 3,990,523 Distribution of wealth Employees Salaries and wages 884,736 22.2% 829,394 20.3% 884,775 22.2% Benefits 295,929 7.4% 269,104 6.6% 295,931 7.4% Severance Indemnity Fund for Employees (FGTS) 66,741 1.7% 61,868 1.5% 66,741 1.7% 1,247,406 31.3% 1,160,366 28.4% 1,247,447 31.3% Taxes, fees and contributions Federal 1,124,752 28.2% 1,166,102 28.5% 1,124,770 28.2% State 32,713 0.8% 2,348 0.1% 32,713 0.8% Municipal 14,490 0.4% 11,024 0.3% 14,491 0.4% 1,171,955 29.4% 1,179,474 28.9% 1,171,974 29.4% Lenders and lessors Interest, exchange and monetary variations 1,489,967 37.3% 673,396 16.5% 1,489,968 37.3% Rentals 17,560 0.4% 13,837 0.3% 17,563 0.4% 1,507,527 37.7% 687,233 16.8% 1,507,531 37.7% Shareholders Interest on capital 63,571 1.6% 300,744 7.4% 63,571 1.6% Retained earnings ______- 0.0% 754,520 18.5% ______- 0.0% ___ 63,571 1.6% 1,055,264 25.9% ___ 63,571 1.6% Wealth distributed 3,990,459 100% 4,082,337 100% 3,990,523 100% The accompanying notes are an integral part of these financial statements F-119

COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) 1. OPERATIONS

In addition to providing basic sanitation services in the State of São Paulo, SABESP may perform these activities in other states and countries, and can operate in drainage, urban cleaning, solid waste handling and energy markets. The company intends to expand it basic operations and, at the same time, become an environmental solutions company.

The company operates water and sewage services in 366 of municipalities of the State of São Paulo, having temporarily discontinued operations in two of these municipalities due to a court order still in progress. In most of these municipalities, the operations are based on 30-year concession agreements. As of December 31, 2008, 68 concessions expired and are being negotiated. From 2009 to 2030, 105 concessions will expire, and the remaining concessions have indefinite term. By December 31, 2008, 160 program contracts were signed.

Management believes that all concessions terminated and not yet renewed will result in new contracts or extensions, and does not consider the risk of discontinuity in the provision of municipal water and sewage services. As of December 31, 2008, the carrying amount of property, plant and equipment used in the 68 municipalities under negotiation totals R$1.582.424 and revenue for the same period totals R$730 million.

In the municipality of Santos, in the Santista lowlands, which has a significant population, the Company operates supported by a authorization public deed, a similar situation in other municipalities in that region and in Ribeira valley, where the Company started to operate after the merger of the companies that formed it.

On January 5, 2007, Law 11445 was enacted, establishing the basic sanitation regulatory framework, providing for the nationwide guidelines and basic principles for the provision of such services, such as social control, transparency, the integration authority of sanitation infrastructures, water resources management, and the articulation between industry policies and public policies for urban and regional development, housing, suppression of poverty, promotion of health and environmental protection, and other related issues. The regulatory framework also aims at efficiently improving quality of living and economic sustainability, allowing for the adoption of gradual and progressive solutions consistent with users’ payment ability.

The Company’s shares have been listed in the Novo Mercado (New Market) segment of the BOVESPA (São Paulo Stock Exchange) since April 2002 and in the New York Stock Exchange (NYSE) as ADRs since May 2002.

The information on concession area, number of municipalities, water and sewage volumes, and other related data disclosed in this report that are not derived from the financial statements is not audited by the independent auditors.

2. Restatement of the financial statements for the year ended December 31, 2008

The financial statements for the year ended December 31, 2008, originally issued on March 31, 2009, in State of São Paulo Official Gazette and Jornal Folha de São Paulo on March 30, 2009, contained a qualification by the independent auditors, in the amount of R$302.8 million for the non-accrual of losses on the balance receivable from the São Paulo State Government (“GESP” or the “State”), related to benefits paid to pensioners and their survivors. The negotiations with the State to regularize these receivables showed significant progress during 2008 (Third Amendment), resulting in the quantification of controversial and Undisputed Reimbursement, as well as the calculation of the Undisputed Amount and the State Attorney General’s commitment to reanalyze the causes that resulted in the Disputed Reimbursement. However, the opinions issued by the State Attorney General in 2009 contradict management’s understanding and confirm the State Government’s understanding. The Company’s management decided then to reissue these financial statements. Theses reissued financial statements recognize the expense in the 2008 income statement as a debit to ‘Other operating expenses, net’ totaling R$409.1 million, which currently corresponds to an expected loss of this receivable. Also as a result of the events above, management understands that in addition to the less than probable likelihood of receiving the portion

F-120 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) named Disputed, the same applies to future payments that will not be reimbursed by the State. Thus, we recognized the obligation related to the actuarial commitment maintained with the beneficiaries, whose right as it is paid by SABESP is for now denied by the State. This expense was recognized in ‘Other operating expenses, net’ and totaled R$535.4 million. For detailed information on this matter please refer to note 7.

The comparative table below shows the amounts previously disclosed and the amounts adjusted by the impact of the events above: COMPANY Originally Adjusted stated Adjustments balances Assets Current assets 2,234,739 2,234,739 Long-term assets 2,541,826 (409,079 ) 2,132,747 Permanent assets 15,746,401 15,746,401

20,522,966 (409,079) 20,113,887

Liabilities and shareholders’ equity Current liabilities 3,016,895 - 3,016,895 Long-term liabilities 7,013,642 535,435 7,549,077 Shareholders' equity 10,492,429 (944,514) 9,547,915 20,522,966 (409,079) 20,113,887

COMPANY

Statement of income Gross revenue from sales and/or services 6,838,803 - 6,838,803 Taxes on revenue (Cofins-Pasep) (487,131) - (487,131)

Net revenue from sales and services 6,351,672 - 6,351,672

Costs, and administrative and selling expenses (4,129,216) - (4,129,216) Financial expenses, net (707,659) - (707,659)

Other operating income and expenses (108,470) (944,514) (1,052,984)

Equity in subsidiary (9) - (9) Pre-tax income from operations 1,406,318 (944,514) 461,804

Income tax (399,194) - (399,194) Social contribution (149,179) - (149,179) Deferred income tax and social contribution 150,140 - 150,140 Income tax and social contribution (398,233) - (398,233)

Net income for the year 1,008,085 (944,514) 63,571

The impacts presented above have also been adjusted in the Consolidated Financial Statements.

3. BASIS OF PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS AND FIRST-TIME ADOPTION OF LAW 11638/07 AND PROVISIONAL MEASURE 449/08 a) Financial statements

F-121 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) The reissuance of the financial statements was approved by the Board of Directors on January 18, 2010.

The financial statements have been prepared in conformity with Brazilian accounting practices and standards established by the Brazilian Securities and Exchange Commission (CVM), observing the guidelines set forth by Brazilian Corporate Law (Law 6404/76), which include new provisions introduced, altered and revoked by Law 11638, of December 28, 2007, and by Provisional Measure 449, of December 3, 2008, and pronouncements issued by the Accounting Pronouncements Committee (CPC). b) Amendment to Brazilian Corporate Law – Law 11638/07 and Provisional Measure 449/08

Pursuant to CVM Resolution 565, of December 17, 2008, which approved Technical Pronouncement CPC 13 – First-time Adoption of Law 11638/07, and to Provisional Measure 449/08, and based on the requirements set forth by CVM Resolution 506, of June 19, 2006, the Company established January 1, 2007 as the transition date for the adoption of the new accounting practices. The transition date is defined as the starting point for the adoption of the changes in Brazilian accounting practices and represents the base date used by the Company for the preparation of its opening balance sheet adjusted to comply with these new provisions.

Using the option provided for in CVM Resolution 565/08, the Company presented restated comparative financial statement amounts from prior periods as if the new accounting practices had always been used.

The related changes in accounting practices which impacted the preparation or presentation of the financial statements for the years ended December 31, 2008 and 2007 were measured and recorded by the Company based on the following accounting pronouncements issued by the Accounting Pronouncements Committee and approved by the Brazilian Securities Commission and by the Federal Accounting Council:

• Framework for the Preparation and Presentation of Financial Statements, approved by CVM Resolution 539, of March 14, 2008; • CPC 01 Impairment of Assets, approved by CVM Resolution 527, on November 1, 2007; • CPC 03 – Statement of Cash Flows, approved by CVM Resolution 547, on August 13, 2008; • CPC 04 Intangible Assets, approved by CVM Resolution 553, on November 1, 2008; • CPC 05 Related-party disclosure, approved by CVM Resolution 560, on December 11, 2008; • CPC 06 Leases, approved by CVM Resolution 554, on November 12, 2008; • CPC 08 Transaction Costs and Premiums on Issuance of Securities, approved by CVM Resolution 556, on November 11, 2008; • CPC 09 Statement of Value Added, approved by CVM Resolution 557, on November 12, 2008; • CPC 12 Discount to Present Value, approved by CVM Resolution 564, on November 17, 2008; • CPC 13 First-time Adoption of Law 11638/07 and Provisional Measure 449/08, approved by CVM Resolution 565, on December 17, 2008; and • CPC 14 Financial Instruments: Recognition, Measurement, and Disclosure, approved by CVM Resolution 566, on December 17, 2008.

The opening balance sheet as of January 1, 2007 (transition date) was prepared considering:

(i) Periodic analysis of the useful life

The Company will revalue the estimates related to the useful life of property, plant and equipment, used in the determination of its depreciation and amortization rates. Possible changes in the estimated economic useful lives of the assets, arising from this revaluation, if material, will be considered as changes in accounting estimates to be prospectively recognized.

(ii) Reclassification of transaction costs on issuance of debentures

The Company recorded the transaction costs on issuance of debentures incurred in 2008 as a reduction of loans, financing and debentures. In 2007, there were no loans and financing with material transaction costs.

(iii) Revaluation reserve

Pursuant to Law 11638/07, the Company opted to maintain the revaluation reserve until its actual realization.

F-122 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) c) Effects of the adjustments under Law 11638/07 and Provisional Measure 449/08

Shareholders’ equity and net income

In compliance to the disclosure requirements regarding the first-time adoption of the new accounting practices, the Company presents the prior year adjustments in the table below, together with a brief description and the amounts related to the impacts on the Company’s shareholders’ equity and net income, as regards the changes introduced by Law 11638/07 and Provisional Measure 449/08.

Shareholders’ Net income - equity - 2006 2007

Balances as of December 31 prior to Law 11638/07 and Provisional Measure 449/08 9,018,482 1,048,703 Disposal of non-reclassifiable deferred assets (i) (10,035) Reversal of amortization of non-reclassifiable deferred assets (i) 6,561

Balances as of December 31 9,008,447 1,055,264

(i) Pursuant to Provisional Measure 449/08, the deferred asset group was eliminated. The Company’s management opted to write off the deferred assets on the transition date.

As a result of the elimination of nonoperating income (expenses) line item introduced by Provisional Measure 449/08, the Company reclassified the amount of R$35,176 to other ‘Operating expenses, net’ line item in the Company’s statement of income for the year ended December 31, 2007.

Statement of Value Added

The statement of value added for the year ended December 31, 2007 was reclassified to comply with Law 11638/07 and Technical Pronouncement CPC - 09, as described below:

Value added previously distributed, disclosed on December 31, 2007 3,986,473

(a) Effects of adoption of Technical Pronouncement CPC - 09 76,148 (b) Adjustment under Law 11638/07 adoption 6,561 (c) Reclassification of the group cost of sales and services to the group payments to the government 13,155

Value added previously distributed, adjusted on December 31, 2007 4,082,337

(a) Investments in own assets constructed, comprised by the difference between income earned in the amount of R$ 90,588 and costs incurred in the amount of R$ 14,440. (b) Reversal of amortization of deferred assets. Pursuant to Provisional Measure 449/08, the deferred asset group was eliminated. Pursuant to Provisional Measure 449/08, the deferred asset group was eliminated. (c) Refer to expenses related to the use of water resources periodically paid to the Brazilian National Water Agency (ANA).

Additionally, other reclassifications were introduced by Law 11638/07 and Provisional Measure 449/08 which have no effect on the value added distributed:

(d) Pursuant to Provisional Measure 449/08, the nonoperating income (expenses) group was eliminated. The balances were reclassified to the group other operating income and other operating expenses. The impacts of this change on the statement of value added were R$ 52,633 and R$ 81,291, respectively.

F-123 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) (e) To conform to the structure suggested by the Technical Pronouncement CPC 09, the group raw material consumed was eliminated. The balance of R$ 112,339 is presented in the group cost of Sales and services.

Consolidated financial statements

The consolidated financial statements include the accounts of the Company and its subsidiary Sesamm, which were included proportionally to its shareholding. The Company holds shared control in the subsidiary, described in details in note 9, and both of them have the same fiscal year and follow consistent accounting policies.

Although the Company does not hold majority ownership interest in Sesamm, the shareholders’ agreement provides veto power for certain matters together with Médio Ambient Inima S/A , indicating the significant influence of the Company on Sesamm. Accordingly, the Company is presenting consolidated financial statements.

The consolidation of the balance sheet and statement of income accounts corresponds to the sum of assets, liabilities, income and expenses, according to their nature, with the appropriate eliminations of the Company’s interest in the capital and retained earnings of the consolidated subsidiary.

4. SIGNIFICANT ACCOUNTING PRACTICES

The Company’s accounting practices are based on the accrual basis of accounting and are in conformity with the Brazilian Corporate Law, as follows:

(a) Revenue from sales and services

(b) Leases

The Company does not conduct lease transactions.

Represented mainly by interest, monetary and exchange variations on loans and financing, contingencies, accounts receivable and temporary cash investments, calculated and recorded on the accrual basis of accounting.

(d) Income tax and social contribution

Income tax and social contribution are calculated based on taxable income.

The rates used are 15%, plus a 10% surtax for income tax and 9% for social contribution tax and the taxes are accounted for on the accrual basis.

Deferred income tax and social contribution are calculated based on taxable amounts or amounts deductible in future periods and are recorded as their realization is probable.

Pursuant to a CVM resolution, the Company decided not to recognize deferred income tax and social contribution on the revaluation reserve of property, plant and equipment recorded through 1991.

(e) Other income and expenses

Other income and expenses are recorded on the accrual basis.

(f) Cash and cash equivalents

Cash includes cash on hand and available bank accounts. Cash equivalents are highly liquid investments, readily convertible to cash and with immaterial risk of change in value.

(g) Financial instruments

F-124 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) Classification and measurement

Financial assets calculated at fair value through profit or loss

These are financial assets held for active and frequent trading. These assets are classified as current assets. Gains or losses arising from changes in the fair value of financial assets measured at fair value through profit or loss are presented in the statement of income under “financial income (loss)” in the period they occur, unless the instrument has been contracted in connection to another transaction. In this case, changes are recognized in the same line item in statements of income affected by this transaction.

Loans and receivables

These comprise receivables which are non-derivative financial assets with fixed or determinable payments, not quoted in an active market. Loans and receivables are included in current assets, except for those with maturity of more than 12 months after the balance sheet date (these are classified as noncurrent assets). The Company's loans and receivables comprise trade accounts receivable, other accounts receivable and cash and cash equivalents. Loans and receivables are recorded at amortized cost, based on the effective interest rate method.

Held-to-maturity assets

These are basically the financial assets that cannot be classified as loans and receivables because they are quoted in an active market. In this case, these financial assets are acquired with the intention and financial capacity for their maintenance in the portfolio up to maturity. These are stated at cost of acquisition, plus earnings when applicable, against income (loss) for the year, based on the effective interest rate method. As of December 31, 2008 and 2007, the Company did not have financial assets classified in this category.

Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are included in this category or that are not classified in any other category. They are included in noncurrent assets, unless the management intends to sell the investment within 12 months after the balance sheet date. Available-for-sale financial assets are recorded at fair value. Interest on available-for-sale securities, calculated based on the effective interest rate method, is recognized in the statements of income as financial income. The portion related to the change in fair value is recorded against shareholders’ equity, in the equity evaluation adjustments account, and it is realized against income (loss) upon its settlement or due to impairment. As of December 31, 2008 and 2007, the Company did not have financial assets classified in this category.

Fair value

Fair values of investments with public quotations are based on current purchase prices. For financial assets without an active market or public quotation, the Company determines fair value through valuation techniques, which consist of the use of recent transactions with third parties, the reference to other substantially similar instruments, the analysis of discounted cash flows and option pricing models which make the greatest use possible of information from the market and the least use possible of information from Company management.

The Company determines, at the balance sheet date, if there is objective evidence that a financial asset or a group of financial assets is impaired. If there is such evidence for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and current fair value minus any impairment loss on this financial asset previously recognized in profit or loss - is transferred from equity to the statement of income.

F-125 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

(h) Trade accounts receivable and allowance for doubtful accounts

Trade accounts receivable, except for agreements on refinanced amounts, do not take into consideration financial charges, monetary adjustment or fines. The allowance for doubtful accounts is recorded in an amount considered sufficient by Management to cover probable losses on the realization of receivables and management does not expect to incur in additional losses on such accounts receivable, especially from municipal governments. The allowance is recorded for accounts that exceed R$5 and that are past due for more than 360 days, and also for accounts that exceed R$30 and that are past due for more than 360 days and which are in the process of judicial collection. The amount thus determined is adjusted when it is excessive or insufficient, based on the analyses of the history of receipts, taking into consideration the expectation of recovery in the different categories of customers. Amounts up to R$5 and past due for more than 180 days are written off against income.

The Company does not record an allowance for doubtful accounts for any amount receivable from the State Government or entities that are controlled by the State Government because it does not expect to incur in any losses on such receivables.

(i) Inventories

(j) Investments

Investments in Sesamm are recorded and evaluated based on the equity accounting method, recognized in income for the year as operating income (or expenses). For the purposes of calculating equity in earnings of subsidiary, unrealized gains or transactions between the Company and its investee are eliminated in proportion to the Company’s investment; unrealized losses are also eliminated, unless the transaction presents evidence of impairment of the transferred asset.

When necessary, the accounting practices of the subsidiary Sesamm are changed to ensure consistency with the accounting practices adopted by the Company.

(k) Property, plant and equipment

Stated at cost, monetarily adjusted through December 31, 1995, combined with the following:

Depreciation is calculated under the straight-line method, at the annual rates mentioned in note 10.

The Company’s management opted to maintain the revaluation reserve until its actual realization.

Financial charges on loans and financing for construction in progress are allocated to the costs of the assets.

The construction in progress projects are recorded at cost and are mainly related to construction projects contracted with third parties.

(l) Intangible assets

F-126 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) From 1999 to 2006, the acquisition of concession rights from third parties has been accounted for at the amount determined in economic and business valuation reports issued by independent experts. The new renewals arising from the new regulatory framework were carried out based on program contracts. Upon renewal of certain program contracts, the Company assumed commitments to financially participate in social and environmental sanitation actions. These commitments are recorded in intangible assets and being amortized according to the effective period of the program contract, mostly in 30 years.

(m) Loans and financing

Borrowings are initially recognized at fair value, upon receipt of funds, net of transaction costs. Subsequently, the borrowings are presented at amortized cost, that is, plus charges and interest in proportion to the period incurred (on a daily prorated based).

Non-convertible debentures are recognized in a similar manner to the loans.

(n) Payroll and related charges

Salaries, including accrual for vacation and 13th salary and additional payments negotiated in collective labor agreements plus related charges are recorded on the accrual basis.

(o) Profit sharing

The accrual for profit sharing is recorded on the accrual basis as operating expenses.

(p) Reserves for contingencies and judicial deposits

These are restated through the balance sheet dates using the probable amount of losses, determined based on their natures and on the opinion of the Company’s legal advisors. For financial statements presentation purposes, the reserve for contingencies and judicial deposits are stated net of the related judicial deposits. The bases and the nature of the reserves for civil, tax, labor and environmental risks are described in note 17.

Other judicial deposits recorded in noncurrent assets are monetarily restated.

(q) Environmental costs

(r) Pension plan

The Company sponsors a private defined benefit pension plan. CVM Resolution 371, of December 13, 2000, requires the recognition of actuarial liabilities in excess of plan assets, based on actuarial calculation carried out by independent actuaries, using the projected unit credit method.

(s) Interest on capital

This interest has been recorded in accordance with Law 9249/95 for tax deductibility purposes, limited to the daily pro rata variation of the Long-term Interest Rate (TJLP), and recorded in shareholders’ equity.

(t) Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses with electricity and provision of services. Actual results could differ from those estimates.

(u) Earnings per share

Calculated based on the number of shares outstanding at the balance sheet dates.

(v) Recovery of assets

Property, plant and equipment and other noncurrent assets, are reviewed to identify evidence of unrecoverable losses annually, and also whenever events or alterations in the circumstances indicate that the carrying amount may not be recoverable. In this case, the recoverable value is calculated to check if there is any impairment. Impairment losses are recognized in the amount by which the carrying amount of

F-127 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) an asset exceeds its recoverable value, which is the higher of net sales price and the value in use of an asset. For measurement purposes, assets are grouped in the lowest level for which there are separately identifiable cash flows.

5. CASH AND CASH EQUIVALENTS

COMPANY CONSOLIDATED ___2008 ___2007 2008 Cash and banks 77,993 72,833 81,638 Cash equivalents 544,066 392,164 544,094 622,059 464,997 625,732

6. TRADE ACCOUNTS RECEIVABLE

(a) Balance sheet balances COMPANY AND CONSOLIDATED COMPANY

___2008 ___2007 Private sector: General and special customers (i) (ii) 736,000 704,626 Agreements (iii) 273,586 202,037 1,009,586 906,663 Government entities: Municipal 521,729 524,519 Federal 28,252 25,792 Agreements (iii) 145,767 81,490 695,748 631,801 Bulk sales – Municipal governments: (iv) Guarulhos 400,210 383,911 Mauá 163,015 135,272 Mogi das Cruzes 16,495 12,549 Santo André 375,345 326,549 São Caetano do Sul 3,363 2,971 Diadema 115,940 99,932 Total bulk sales – Municipal governments 1,074,368 961,184

Unbilled supply 309,805 301,695 Subtotal 3,089,507 2,801,343 (1,633,289) (1,314,671) Allowance for doubtful accounts Total 1,456,218 1,486,672

Current 1,129,746 1,207,885 Noncurrent (v) 326,472 278,787

(i) General customers - residential and small and medium-sized companies.

(ii) Special customers - large consumers, commercial, industries, condominiums and special billing consumers (industrial waste, wells, etc.).

(iii) Agreements – installment payments of past-due receivables, plus monetary adjustment and interest.

(iv) Bulk Sales – municipal governments – This balance refers to the sale of treated water to municipalities, which are responsible for distributing to, billing and charging final consumers. Some of these municipalities are questioning in court the tariffs charged by SABESP and do not pay for the amounts in dispute. The amounts past due, which are substantially included in the allowance for doubtful accounts, are classified in long-term assets pursuant to the changes below:

COMPANY AND CONSOLIDATED COMPANY

2008 2007

F-128 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) Balance at beginning of year 961,184 838,006 Revenue for services provided 314,288 292,041 Receipts – services in the current year (135,347) (141,451) Receipts – services in previous years (65,757) (27,412) Balance at end of year 1,074,368 961,184 Current 51,384 50,769 Noncurrent 1,022,984 910,415

(b) The aging of trade accounts receivable is as follows

COMPANY AND CONSOLIDATED COMPANY

2008 2007 Current 949,209 783,946 Past-due: Up to 30 days 131,542 148,498 From 31 to 60 days 73,370 81,244 From 61 to 90 days 46,708 55,821 From 91 to 120 days 38,413 46,202 From 121 to 180 days 66,267 81,313 From 181 to 360 days 128,033 151,993 Over 360 days 1,655,965 1,452,326 Total 3,089,507 2,801,343

(i) Changes in the allowance during the year were as follows:

COMPANY AND CONSOLIDATED COMPANY 2008 2007 Previous balance 1,314,671 1,123,157

Private sector/government entities 99,370 86,213 Bulk sales 219,248 105,301

Additions for the year 318,618 191,514 Balance 1,633,289 1,314,671

Current 778,238 587,713 Noncurrent 855,051 726,958

(ii) In profit or loss

The Company recorded probable losses on accounts receivable in 2008 in the amount of R$336,264, R$17,646 of which (net of recoveries) were written off from accounts receivable (in 2007 – R$131,825), under ‘Selling expenses’. In 2007, these losses amounted to R$323,339.

7. RELATED-PARTY BALANCES AND TRANSACTIONS

F-129 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) The Company is a party to transactions with its controlling shareholder, the State Government, and companies related to it.

(a) Accounts receivable, interest on capital and operating revenue with the São Paulo State Government COMPANY AND CONSOLIDATED 2008 2007 (Adjusted-note 2) Accounts receivable Current: Water and sewage services (i) 113,642 311,528 Gesp Agreement (iii), (iv) and (v) 28,256 26,978 Reimbursement of additional retirement and pension benefits – Agreement (ii) and (vi) 23,050 - Reimbursement of additional retirement and pension benefits paid – Monthly flow (ii) and (vi) 45,183 - Total current 210,131 338,506 Long term: Water and sewage services – Gesp Agreement (iii) (iv) and (v) 92,396 107,911 Reimbursement of additional retirement and pension benefits paid – Controversial (ii) and (vi) 409,079 879,077 Allowance for losses – Controversial (vii) (409,079) -

Reimbursement of additional retirement and pension benefits – Agreement (ii) and (vi) 192,077 - Reimbursement of additional retirement and pension benefits – Reservoir (ii) and (vi) 696,283 - Gross long-term amount receivable from shareholder 980,756 986,988 Total receivable from shareholder 1,190,887 1,325,494

Provision of water and sewage services 234,294 446,417 Reimbursement of additional retirement and pension benefits 956,593 879,077 1,190,887 1,325,494

Interest on capital payable 148,861 551,974

Gross revenue from sales and services Water sales 186,286 185,976 Sewage services 157,349 149,853 Receipts (281,823) (326,065)

Financial income 62,179 51,469

(i) Water and sewage services

(ii) Reimbursement of additional retirement and pension benefits paid

Refers to amounts of supplementary retirement and pension benefits provided for in State Law 4819/58 (“Benefits”) paid by the Company to former employees and their survivors.

Under the Agreement referred to in (iii), Gesp recognizes its liability from charges arising from the Benefits, provided that the payment criteria set forth by the State Personnel Department (DDPE), based on legal guidance of the Legal Consultancy of the Finance Department and of the State Attorney General’s Office (PGE), are followed.

F-130 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) As presented in item (vi), some differences associated to the criteria used by the Company for the calculation and eligibility of the benefits were found during the validation performed by Gesp of the amounts due to the Company related to the benefits.

As of December 31, 2008 and 2007, 2,604 and 2,635 retired employees, respectively, received additional retirement benefits, and for the years ended December 31, 2008 and 2007, the Company paid R$110,763 and R$104,622, respectively. There were 143 active employees as of December 31, 2008 who will be entitled to these benefits as a result to their retirement in comparison to 144 as of December 31, 2007.

On January 2004, the payments that supplement retirement and pension benefits were transferred to the Finance Department and would be made in accordance with the calculation criteria determined by the PGE. As a result of a court decision, the responsibility for the payments is of SABESP again, as they were initially.

(iii) Gesp Agreement

On December 11, 2001, the Company, the São Paulo State Government (through the State Finance Business Department, currently Finance Department) and the Water and Electricity Department (DAEE), with the intermediation of the Sanitation and Energy Department (former Water Resources, Sanitation and Construction Works Department), signed the Recognition Instrument, Consolidation of Debts, Payment Commitment and Other Covenants (“Gesp Agreement”) for the settlement of outstanding debts between Gesp and the Company related to the provision of water supply and sewage services and to benefits.

The total agreement amounted to R$678,830, at historical value, R$320,623 of which refers to additional retirement and pension benefits in the period between March 1986 and November 2001, and (ii) R$358,207 arising from the provision of water supply and sewage collection services, billed in and past due since 1985 until December 1, 2001, but not paid by Gesp.

In view of the strategic importance of the Taiaçupeba, Jundiaí, Biritiba, Paraitinga and Ponte Nova reservoirs for guaranteeing and maintaining the Upper Tietê water volume, the Company agreed to receive them as partial repayment of the reimbursement related to benefits. The DAEE intends to transfer these assets to the Company as partial amortization, by assigning a receivable in the amount owed by the State.

However, the São Paulo State Public Prosecution Office challenged the legal validity of this agreement, and its main argument is the absence of a specific legislative authorization for disposal of DAEE’s assets. The Company’s legal advisors evaluate the risk of loss from this lawsuit as probable, in case the legislative authorization is not obtained, which would hinder the transfer of the related reservoirs as a partial amortization of the balance receivable.

The balances of water supply and sewage collection services were included in the First amendment as described in items (iv) and (v) below. The balances related to the reimbursement of additional retirement and pension benefits were included in the Commitment Agreement between São Paulo State and SABESP, as described in items (vi) and (vii) below.

(iv) First Amendment to the Gesp Agreement

On March 22, 2004, the Company and the State Government amended the terms of the original Gesp Agreement, (1) consolidating and recognizing the amounts due by the State Government for water supply and sewage collection services provided, monetarily adjusted until February 2004; (2) formally authorizing the offset of amounts due by the State Government with interest on capital declared by the Company and any other debit existing with the State Government as of December 31, 2003, monetarily adjusted until February 2004; and (3) defining the payment conditions of the remaining liabilities of the State Government for the receipt of the water supply and sewage collection services.

Pursuant to the Amendment, the State Government recognized the amounts due to the Company for services water supply and sewage collection services provided until February 2004 in the amount of R$581,779, including monetary adjustment based on the Reference Rate (TR) at the end of each year until February 2004. The Company recognized amounts payable to the State Government related to interest on own capital in the amount of R$518,732, including (1) amounts declared and paid related to years prior to 2003 (R$126,967), (2) monetary adjustment of these amounts based on the annual variation of the Consumer Price Index (IPC/Fipe) until February 2004 (R$31,098); and (3) amounts declared and due related to 2003 (R$360,667.

The remaining liability is to be paid in monthly installments from May 2005 to April 2009, monetarily restated by the Extended Consumer Price Index (IPCA/IBGE), plus interest of 0.5%.

F-131 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) The Amendment to the Gesp Agreement does not provide for amounts due by the State Government related to the additional retirement and pension plan benefits paid on behalf of the State Government by the Company, which are still subject to the terms of the original Gesp Agreement.

(v) Second Amendment to the Gesp Agreement

On December 28, 2007, the Company and the State Government, by means of the Finance Department, signed the second amendment to the terms of the original Gesp Agreement, (1) agreeing upon the payment in installments of the remaining balance of the First Amendment, amounting to R$133,709 (on November 30, 2007), to be paid in 60 monthly and consecutive installments of the same amount, the first of which falling due on January 2, 2008. The amount of the installments will be monetarily restated in accordance with the variation of the IPCA-IBGE, plus interest of 0.5% per month. The balance of this agreement, the installments of which have been paid monthly paid, includes the amount of R$46,244, which the State does not recognize as due. SABESP’s understanding differs from that of the State regarding this amount and does admit the review of these previously agreed-upon amounts without the supported and unequivocal demonstration of the lack of relation support between the amounts presented by SABESP and the services effectively provided. For this reason the Company understands that the recognition of an allowance for losses regarding these amounts is not necessary (pursuant to item VII, of the Recitals, of the Second Amendment to the Recognition Instrument, Payment Commitment and Other Covenants between the State of São Paulo and SABESP). (2) With respect to the accounts past due and unpaid in the period between March 2004 and October 2007, arising from the provision of water supply and sewage collection services in the amount of R$256,608, R$236,126 was received and R$8,784 was transferred to another debtor, and R$ 11,698 is pending confirmation of receipt. These amounts are being jointly analyzed by SABESP and the representatives of the many State departments. To date, differences regarding the debtor but not the amount of the debt have been identified. In the event of the change of the entity responsible for paying the account, SABESP will transfer the charge to the respective Entity. The Company did not recognize an allowance for losses in this amount as it understands that the differences are substantially related to the identification of the debtor. (3) The interest on own capital due by SABESP to the State, related to the period between March 2004 and December 2006, in the amount of R$400,823, restated between June 2007 and November 2007, based on the Selic (central Bank overnight rate), was paid in the period between January and March 2008. (4) The State and SABESP agreed on immediately resuming the compliance with their mutual obligations under new assumptions: (a) implementation of an electronic account management system to facilitate and speed up the monitoring of payment processes and budget management procedures; (b) structuring of the Rational Water Use Program (PURA) to rationalize the consumption of water and the amount of the water and sewage bills under the responsibility of the State; (c) establishment, by the State, of criteria for budgeting so as to avoid the reallocation of amounts to a specific water and sewage accounts as from 2008; (d) possibility of registering state bodies and entities in a delinquency system or reference file; (e) possibility of interrupting water supply to state bodies and entities in the case of nonpayment of water and sewage bills.

Approximately 94% of the billing from November 2007 and January 2009 has already been paid by the State Government.

(vi) Third Amendment to the Gesp Agreement

Gesp, SABESP and DAEE signed the Third Amendment to the Gesp Agreement on November 17, 2008, through which Gesp recognized a debt balance payable to SABESP in the amount of R$915,251, monetarily adjusted up to September 2008 in accordance with the fluctuation of the IPCA-IBGE, corresponding to the Undisputed Reimbursement, determined by FIPECAFI. SABESP accepted on a provisional basis the reservoirs as part of the payment of the Undisputed Reimbursement and offered to Gesp a provisional settlement, recognizing a credit in the amount of R$696,283, corresponding to the value of the reservoirs. The final settlement will only be effected on the actual transfer of the property with the proper Registry of Deeds Office. The outstanding balance in the amount of R$218,967 is being paid in 114 monthly and consecutive installments, in the amount of R$1,920 each, including the annual IPCA/FIPE variation, plus interest of 0.5% p.m., the first of which falling due on November 25, 2008.

The Company and the State Government are working together on the obtainment of a legislative authorization to transfer the reservoirs to SABESP, overcoming the uncertainties arising from the public lawsuit mentioned in item (iii). The reservoirs will be transferred to the Company after the publication of the legislative authorization.

In addition, the third amendment provides for the regularization of the monthly flow of benefits. While SABESP is liable for the flow of monthly payment of benefits, the State shall reimburse SABESP based on

F-132 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) the criteria identical to those applied when determining the Undisputed Reimbursement. Should there be no preventive court decision, the State shall assume the flow of monthly payment of benefits portion deemed as undisputed.

The difference between the Undisputable Reimbursement and the amount actually paid by the Company is the Disputed Reimbursement. On March 4, 2009, the Company submitted a request for the review of the differences which originated the Disputed Reimbursement to the State Attorney General.

(vii) As mentioned before, on November 17, 2008 the Company and the State signed the Third Amendment to the GESP Agreement, when the reimbursements called disputed and undisputed were quantified. This amendment established the efforts to calculate the so-called Disputed Reimbursement of the Benefits. Under clause four (4) of the amendment, the Disputed Reimbursement represents the difference between the Undisputable Reimbursement and the amount actually paid by the Company as Pension benefits and survivors’ pensions set out in Law 4819/58, for which, the Company understands, the State of São Paulo is originally liable, but paid by SABESP by May 2008, under a court order.

By entering into the Third Amendment, the PGE agreed to reassess the differences that gave rise to the disposed reimbursement of benefits set out in Law 4819/58. At the time, this expectation was based on the willingness of the PGE to reanalyze the issue and the implied right of the Company to the reimbursement, including based on opinions from outside legal advisors.

In view of these circumstances, the Company’s management decided to restate the financial statements for the year ended December 31, 2008 to expense the allowance for losses related to this disputed balance. This expense was recognized in ‘Other operating expenses, net’ and totaled R$409.1 million for the year ended December 31, 2008.

Also as a result of the events above, management understands that in addition to the less than probable likelihood of receiving the portion named Disputed, the same applies to future payments that will not be reimbursed by the State. Thus, we recognized the obligation related to the actuarial commitment maintained with the beneficiaries, whose right as it is paid by SABESP is for now denied by the State. This expense was recognized in ‘Other operating expenses, net’ and totaled R$535.4 million. For detailed information on the actuarial obligation matter please refer to note 15.

(b) Cash and cash equivalents

The Company’s cash and cash equivalents with financial institutions controlled by the State Government amounted to R$579,750 and R$421,630 as of December 31, 2008 and 2007, respectively. The financial income arising from these investments totaled R$62,179 and R$51,469 in the years ended December 31, 2008 and 2007, respectively. The Company must, pursuant to a State Decree, invest its surplus resources with financial institutions controlled by the State Government.

In its operations, the Company uses the Guarapiranga and Billings reservoirs; should these reservoirs not be available for use to the Company, there could be the need to collect water in more distant places. The Company does not pay any fee for the use of these reservoirs but it is responsible for their maintenance and operating costs.

F-133 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) (d) Agreements with lower tariffs with State and Municipal Government Entities that joined the Rational Water Use Program (PURA)

The Company has signed agreements with government entities related to the State Government and municipalities where it operates involving approximately 6,130 properties that benefit from a reduction of 25% in the tariff of water supply and sewage collection services when they are not in default. These agreements provide for the implementation of the rational water use program, which takes into consideration the reduction in the consumption of water.

(e) Guarantees

The State Government grants guarantees for some loans and financing of the Company and does not charge any fee with respect to such guarantees.

Management is making efforts to maintain the State’s payments with respect to transactions with related parties in non-default on a permanent basis.

(f) Sesamm

On August 15, 2008, as part of its growth process, the Company, together with the companies OHL Médio Ambiente, Inima S.A.U. Unipersonal (a “Inima”), Técnicas y Gestión Medioambiental S.A.U. (a “TGM”) e Estudos Técnicos e Projetos ETEP Ltda. (“ETEP”) incorporated the company Sesamm – Serviços de Saneamento de Mogi Mirim S/A (“Sesamm” or the “Subsidiary”), which is engaged in the provision of complementary services to the sewage diversion system and implementing and operating a sewage treatment system in the municipality of Mogi Mirim, including the disposal of generated solid waste, as mentioned in note 9.

(g) Personnel assignment agreement among entities related to the State Government

The Company has personnel assignment agreements with entities related to the State Government, under which the expenses are fully passed on and monetarily reimbursed.

In 2008, the expenses with personnel assigned by SABESP to other state government entities amounted to R$5,503.

In the same period, the expenses with personnel assigned by other entities to SABESP totaled R$1,267.

(h) Services obtained from state government entities

As of December 31, 2008, SABESP had an outstanding amount payable of R$17,739 for services rendered by São Paulo state government entities. We may mention the electric power supply by Companhia Energética de São Paulo - CESP and the coordination of construction work the Water and Electricity Department (DAEE) in reservoirs owned by the latter and used by the Company, which correspond to 93% of the payable balance.

Expenses related to construction work performed by DAEE amount to R$11,135.

(i) Nonoperating assets

As of December 31, 2008 and 2007, the Company had an amount of R$26,479 mainly related to free land leased to the associations, support entities, non-governmental organizations and to DAEE (Water and Electricity Department), among others. The free land leased to DAEE amounts to R$2,289.

(j) Sabesprev

The Company sponsors a private defined benefit pension plan, which is operated and administered by Fundação SABESP de Seguridade Social – Sabesprev. The net actuarial liability recognized as of December 31, 2008 amounts to R$419,871.

8 - INDEMNITIES RECEIVABLE

F-134 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) and sewage collection services of the Company in 1995. As of December 31, 2008 and 2007, this asset amounted to R$148,794 (nominal amounts).

The net book value of property, plant, and equipment relating to the Municipality of Diadema, reclassified in December 1996, amounted to R$75,231, and the indemnity balance from the municipality amounted to R$62,876.

The net book value of property, plant, and equipment relating to the Municipality of Mauá, reclassified in December 1999, amounted to R$103,763, and the indemnity balance from the municipality amounted to R$85,918.

The Company’s right to recover these amounts have been challenged by the municipalities and no amount has been received to date.

SABESP filed lawsuits to collect the amounts due by the municipalities. With respect to Diadema, the decision of the lower court judge was unfavorable to SABESP, which filed an appeal in November 2000. On December 2005, SABESP’s appeal to have the agreement entered into with the municipality of Diadema declared valid was partially accepted. In October 2006, the municipality administration office filed special and extraordinary appeals, which were rejected by the Chief Jude on March 2007. The municipal administration office filed new interlocutory appeals against this decision. The interlocutory appeal filed to the Federal Supreme Court (STF) was accepted but only for the purposes of determining the sentence for the extraordinary appeal that had been rejected. On December 2007, the decision that accepted the execution of the Companhia de Saneamento the Diadema – Saned was rendered, ordering this company to be summoned to pay the full amount of the debt within 15 days under the penalty of fine. Saned filed an interlocutory appeal against the decision but the appeal was rejected by the Court of Justice in June 2008. Accordingly, the judge approved the seizure of cash from Saned’s bank accounts and temporary cash investments (online seizure) in the proportion of 10% of the adjusted debt, but did not approve the seizure of a percentage of Saned’s billing. Saned filed an appeal regarding the first decision and SABESP filed an appeal regarding the second decision, and both await judgment. The seizures made total R$2,838 (already transferred to judicial account). Subsequently, the Court of Justice determined that the seizure be made through weekly deposits by Saned in the amount corresponding to 20% of everything received in its bank accounts and temporary cash investments.

On December 29, 2008, Saned and the Municipality of Diadema signed a Letter of Intentions with the São Paulo State and SABESP with the purpose of preparing studies and conducting negotiations to guide Diadema’s and SABESP’s decisions, aiming to establish SABESP as the exclusive provider of water supply and sewage collection services for the Municipality of Diadema, within three months.

In January 2009, the parties filed a joint petition requesting the suspension of new seizures, for a three- month period, trying to enable an agreement.

With respect to Mauá, a lower court decision demanded this Municipality to pay the amount of R$153.2 million as a compensation for loss of profits. In April 2005, the Municipality of Mauá filed an appeal against this decision. On July 2006, the decision was converted into a measure consisting of an expert clarification on the amount of the indemnity for loss of profits. The clarification was provided on December 2007, and the expert confirmed the amount of the loss of profits determined by the lower court. In August 2008, the Court of Justice decided for the integral maintenance of the lower court decision. The Company can still file an appeal against this decision.

9. INVESTMENTS

F-135 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) Equity in 2007 Capital increase subsidiary 2008 Sesamm - 3,841 (9) 3,832 Other 720 - - 720 Total 720 3,841 (9) 4,552

On August 15, 2008, with a 30-year duration period counted from the signing of the Concession Agreement with the municipality. On August 15, 2008, the company Sesamm – Serviços de Saneamento de Mogi Mirim S/A was incorporated for a period of 30 years as of the date the concession contract with the municipality was executed for the purpose of providing complementary services to the sewage diversion system and implementing and operating a sewage treatment system in the municipality of Mogi Mirim, including the disposal of generated solid waste. Sesamm’s capital as of December 31, 2008, in the amount of R$ 10,669, comprises 10,669,549 nominative shares, without a par value, and SABESP holds 36% of the voting rights.

The Company entered into an agreement which provides veto power for certain situations together with Médio Ambient Inima S/A.

10. PROPERTY, PLANT AND EQUIPMENT COMPANY

2008 2007 Adjusted Accumulated cost depreciation Net Net

In use Water systems: Land 963,427 - 963,427 961,538 Buildings 2,754,928 (1,657,905) 1,097,023 1,251,672 Connections 1,035,085 (424,771) 610,314 584,979 Water meters 306,845 (153,635) 153,210 144,300 Networks 3,568,318 (1,182,216) 2,386,102 2,391,789 Wells 209,646 (116,162) 93,484 97,490 Equipment 554,575 (380,152) 174,423 169,185 Other 16,722 (13,837) 2,885 3,124 9,409,546 (3,928,678) 5,480,868 5,604,077 Sewage systems: Land 349,734 - 349,734 348,508 Buildings 1,658,417 (711,226) 947,191 1,002,059 Connections 966,460 (426,807) 539,653 552,297 Networks 5,695,263 (1,363,032) 4,332,231 4,320,058 Equipment 624,878 (463,352) 161,526 123,124 Other 5,054 (3,001) 2,053 2,113 9,299,806 (2,967,418) 6,332,388 6,348,159 General use: Land 107,706 - 107,706 107,706 Buildings 139,009 (84,952) 54,057 57,882 Transportation equipment 147,037 (127,363) 19,674 10,959 Furniture, fixtures and equipment 355,529 (194,332) 161,197 139,733 Free lease land 20,556 - 20,556 20,556 Free lease assets 8,412 (2,489) 5,923 5,923 778,249 (409,136) 369,113 342,759 Subtotal in use 19,487,601 (7,305,232) 12,182,369 12,294,995

Construction in progress: Water systems 935,829 - 935,829 734,016 Sewage systems 1,800,344 - 1,800,344 1,018,620 Other 7,891 - 7,891 3,737 Subtotal in progress (d) 2,744,064 - 2,744,064 1,756,373

Grand Total 22,231,665 (7,305,232) 14,926,433 14,051,368

F-136 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

The consolidated balance totals R$14,926,616, being the difference of R$168 related to sewage treatment projects and of R$ 15 mainly represented by furniture, fixtures and equipment.

Property, plant and equipment represent assets involved in the provision of water supply and sewage collection services in 352 municipalities. Under the assets arising from contracts negotiated based on economic and financial reports and program contracts, SABESP is both the owner and the manager.

In December 2008, 68 concession agreements had expired and all of them are under negotiation with the municipalities, without hindering the service provision. The carrying amount of property, plant and equipment used in these municipalities totals R$1,582,424. In 2008, the depreciation charges of these municipalities were R$44,454.

The concession agreements provide for the assets to be returned to the concession grantor at the end of the term by means of an indemnity at the net book value or fair value in accordance with what is stipulated in each contract. In the program contracts, the indemnity will correspond to the present value of the cash flow in the remaining period on the date the services are resumed, monetarily restated, plus interest to the date of the effective payment.

(a) Depreciation

Depreciation is calculated based on the following annual rates:

Buildings – 4%, connections – 5%, water meters – 10%, networks – 2%, wells – 5%, equipment – 10%, transportation equipment – 20%, furniture and fixtures – 10%.

(b) Disposals of property, plant, and equipment

(i) In 2008, the Company wrote off property, plant and equipment items in the amount of R$20,632 (2007 – R$ 68,568, which resulted in a total loss of R$68,349), of which R$12,105 (2007 – R$14,247) refers to items in use, due to obsolescence, theft and sale, and R$8,527 (2007 – R$54,103) to discontinued construction, unproductive wells and projects considered economically unfeasible.

(ii) In 2008, the Company recorded losses on property, plant and equipment in the amount of R$137,346 referred to leasehold improvements (DAEE – Sistema Produtor Alto Tietê).

The Company capitalized interest and monetary adjustment, including exchange variation, in property, plant and equipment in the amount of R$219,430 in the year ended December 31, 2008, (2007 – (R$13,338) and during this period these assets were presented as construction in progress.

(d) Construction in progress

Construction in progress refers mainly to new projects and operating improvements and is represented by: COMPANY

2008 2007 Water systems: Networks and connections 300,630 178,977 Transmission 24,835 22,281 Water treatment 90,133 71,375 Sub-transmission 343,657 225,646 Production and storage 126,648 160,602 Other 49,926 75,135 Total water systems 935,829 734,016 Sewage systems: Collection 1,332,002 710,960 Treatment 335,451 179,604 Other 132,891 128,056 Total sewage systems 1,800,344 1,018,620 Other 7,891 3,737 Total 2,744,064 1,756,373

F-137 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

The consolidated balance totals R$2,744,232, and the difference of R$168 is represented by sewage treatment projects.

The estimated disbursements related to already contracted investments total approximately R$2,222 million for the years from 2009 to 2013 (unaudited).

(e) Expropriations

The amount of compensation to be paid starting in 2009 is estimated at approximately R$489 million (unaudited) which will be paid with own funds. The assets to be received as a result of these negotiations will be recorded as property, plant, and equipment after the transaction is completed. In 2008, the amount related to expropriations was R$11,004 (2007 - R$16,813).

(f) Assets pledged as guarantee

As of December 31, 2008 and 2007, the Company had assets in the amount of R$249,034 offered as guarantee to the request for the Paes (tax debt refinancing program) (note 14).

(g) Nonoperating assets

(h) Revaluation

Property, plant and equipment items were revalued in 1990 and 1991 and are depreciated at annual rates that correspond to their remaining useful lives determined in the related reports, which, as general rule, fall into the periods of the rates presented above.

As allowed by CVM Instruction No. 197/93, the Company failed to recognize a provision for the deferred tax effect on the appreciation arising from the revaluation of property, plant and equipment in 1990 and 1991. Should income tax and social contribution be recognized on the revaluation reserve, the unrealized amount as of December 31, 2008 would total R$371,088 (2007 – R$400,606). The amounts of R$87,670 and R$86,816 of the revaluation reserves were realized in the years ended December 31, 2007 and 2008, respectively.

The Company’s management opted to maintain the revaluation reserve until its actual realization.

(i) Fully depreciated assets

As of December 31, 2008, the carrying amount of the fully depreciated assets that are still in use is R$882,707 (2007 – R$606,142).

11. INTANGIBLE ASSETS

(a) Concession agreements based on economic-financial appraisal report

From 1999 to 2006, the negotiations for new concessions were conducted on the basis of the economic and financial profit or loss of the transaction, determined in an appraisal report issued by independent experts.

The amount determined in the respective contract, after the transaction is closed with the municipal authorities, with payment through Company shares or in cash, is recorded in this account and amortized over the period of the related concession (usually 30 years). As of December 31, 2008 and 2007 there were no amounts pending related to these payments to the municipalities.

COMPANY AND CONSOLIDATED COMPANY

F-138 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) Intangible assets 2008 2007 Concessions (i) 509,724 507,789 Program contracts (commitments) (ii) 249,639 - Software license (iii) 9,602 - Program contracts - investments made (iv) 46,451 8,705 Total 815,416 516,494

(i) Concessions

The net amount shown relates to concessions with the following municipalities:

COMPANY AND CONSOLIDATED COMPANY 2008 2007 Historical Accumulated cost amortization Net Net Agudos 8,695 (2,466) 6,229 5,606 Bom Sucesso do Itararé 734 (60) 674 313 Campo Limpo Paulista 17,650 (3,868) 13,782 12,045 Conchas 3,786 (730) 3,056 2,951 Duartina 1,855 (410) 1,445 1,246 Estância de Serra Negra 15,582 (2,505) 13,077 13,203 Itapira 16,148 (1,330) 14,818 14,793 Itararé 6,438 (1,835) 4,603 4,167 Marabá Paulista 1,885 (183) 1,702 1,496 Miguelópolis 10,648 (1,426) 9,222 3,201 Osasco 295,841 (79,242) 216,599 218,860 Paraguaçu Paulista 15,687 (4,707) 10,980 10,233 Paulistânia 157 (40) 117 120 Sandovalina 2,523 (216) 2,307 2,283 Santa Maria da Serra 1,171 (312) 859 882 São Bernardo do Campo 237,464 (38,981) 198,483 206,437 Várzea Paulista 15,608 (3,837) 11,771 9,953 Total 651,872 (142,148) 509,724 507,789

Intangible assets are amortized over the term of the concession agreements entered into with the related municipalities.

In 2008 and 2007, amortization expenses related to concession intangible rights were R$21,509 and R$20,311, respectively.

(ii) Program contracts (commitments)

After the enactment of the regulatory framework, renewals are made through program contracts. In some program contracts the Company assumed commitments to financially participate in social and environmental sanitation actions. These commitments were recorded as a contra entry to intangible assets in the amount ofR$252,770 net of the adjustment to present value of R$81,726. These commitments are being amortized according to the effective period of the program contract (mostly 30 years).

The committed amounts refer to the following municipalities: COMPANY AND CONSOLIDATED

2008 Accumulated Municipality Amount amortization Net Alfredo Marcondes 70 (2) 68 Aparecida D’Oeste 45 (1) 44 Avaré 5,000 (83) 4,917 Bento de Abreu 50 (2) 48 Bocaina 800 (27) 773 Caçapava 9,000 (150) 8,850 Campos do Jordão 3,000 (133) 2,867 Capão Bonito 2,000 (33) 1,967 Emilianópolis 112 (5) 107

F-139 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) Fartura 243 (4) 239 Fernandópolis 9,500 (317) 9,183 Franca 20,676 (976) 19,700 Indiaporã 250 (4) 246 Jales 4,426 (197) 4,229 Lorena 9,000 (300) 8,700 Mococa 8,844 (147) 8,697 Mombuca 197 (7) 190 Monte Alto 5,000 (97) 4,903 Novo Horizonte 5,000 (83) 4,917 Pindamonhangaba 16,000 (356) 15,644 Piratininga 350 (7) 343 Planalto 39 (2) 37 Riolândia 2,643 (44) 2,599 São José dos Campos 142,945 - 142,945 São Luiz Paraitinga 600 (20) 580 São Manuel 1,300 (22) 1,278 Tupã 5,540 (108) 5,432 Valentim Gentil 140 (4) 136 Total 252,770 (3,131) 249,639

In 2008, amortization expenses related to the program contracts total R$3,131.

The amounts not yet disbursed related to program contracts are recorded in ‘Other obligations’ in current liabilities, R$35,308, and noncurrent liabilities, R$111,118.

(iii) Software license

As of December 31, 2008, the net amount of software license was R$9,602.

(iv) Program contracts – investments made

These refer to the renewals of contracts previously denominated as full concession to operation concession, through program contracts with the purpose of providing municipal public utility services of water supply and sewage collection, under which the Company is both the owner and the manager of the assets purchased or constructed during the period of these contracts (30 years).

COMPANY AND CONSOLIDATED COMPANY 2008 2007 Adjusted Accumulated cost amortization Net Net Water system Buildings 567 (9) 558 31 Connections 6,574 (99) 6,475 1,180 Water meters 4,627 (99) 4,528 1,024 Networks 5,174 (72) 5,102 627 Wells 752 (5) 747 - Equipment 3,075 (55) 3,020 518 Other 111 (1) 110 - Subtotal 20,880 (340) 20,540 3,380 Sewage systems Buildings 6,802 (105) 6,697 1,751 Connections 6,204 (113) 6,091 1,427 Networks 8,593 (118) 8,475 1,214 Equipment 1,810 (26) 1,784 217 Subtotal 23,409 (362) 23,047 4,609 General use Buildings 66 (2) 64 - Transportation equipment 1,042 (33) 1,009 189 Furniture, fixtures and equipment 1,836 (45) 1,791 527 Subtotal 2,944 (80) 2,864 716 Total 47,233 (782) 46,451 8,705

The assets of the municipalities are amortized over the period of the program contracts.

F-140 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

12 - LOANS AND FINANCING COMPANY AND CONSOLIDATED COMPANY 2008 2007 Annual interest Inflation Current Noncurrent Total Current Noncurrent Total Guarantees Final maturity rates adjustment Financial institution: LOCAL São Paulo St. Govt. and Own Federal Government/Banco do Brasil 263,497 1,406,001 1,669,498 238,194 1,642,644 1,880,838 funds 2014 8.50% UPR th Debentures 6 issue 240,346 229,690 470,036 - 427,657 427,657 No guarantees 2010 11% IGP-M th Debentures 7 issue 200,000 123,497 323,497 - 312,362 312,362 No guarantees 2010 CDI+1.5% and 10.8% IGP-M th Debentures 8 issue 350,000 425,831 775,831 - 737,438 737,438 No guarantees 2011 CDI+1.5% and 10.75% IGP-M th Debentures 9 issue - 218,146 218,146 - - - No guarantees 2015 CDI+2.75% and 12.87% IPCA Caixa Econômica Federal 68,840 567,149 635,989 58,267 490,904 549,171 Own funds 2008/2022 5% to 9.5% UPR FIDC – Sabesp I 55,556 69,444 125,000 55,555 125,000 180,555 Own funds 2011 CDI + 0.70% National Bank for Economic and Social Development (BNDES) 42,814 126,657 169,471 41,904 165,689 207,593 Own funds 2013 3% + TJLP 6% LIMIT National Bank for Economic and Social Development (BNDES) - Santos lowland - 32,145 32,145 2019 2.5%+TJLP 6% LIMIT Other 2,802 13,586 16,388 3,146 18,753 21,899 2009/2011 12% / CDI /TJLP + 6% UPR Interest and charges 118,843 29,281 148,124 93,398 32,036 125,434 Total local 1,342,698 3,241,427 4,584,125 490,464 3,952,483 4,442,947

FOREIGN

Inter-American Development Bank (IADB) Federal Currency Basket US$412,260,000 (2007 – US$432,099,000) 86,420 877,031 963,451 64,764 700,613 765,377 Government 2016/2025 3.00% to 5.61% Variation+US$ Eurobonds – US$140,000,000 (2007 – US$238,052,000) - 327,180 327,180 173,680 247,982 421,662 2016 7.5% US$

JBIC - ¥15,116,861,000 Federal (2007- ¥2,654,422,000) - 390,015 390,015 - 42,043 42,043 Government 2029 1.8% and 2.5% Yen IADB 1983AB – US$250,000,000 - 580,595 580,595 - - - 2023 4.47% to 4.97% US$ Interest and charges 19,742 - 19,742 13,206 - 13,206 Total foreign 106,162 2,174,821 2,280,983 251,650 990,638 1,242,288 TOTAL LOANS AND FINANCING 1,448,860 5,416,248 6,865,108 742,114 4,943,121 5,685,235

Exchange rate as of December 31, 2008: US$2.3370; Yen 0.02580 – (2007 – US$1.7713; Yen 0.015839)

As of December 31, 2008, the Company did not have balances of loans and financing raised in the short-term

F-141 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

(a) Banco do Brasil

In March 1994, existing loan agreements with Caixa Econômica Federal were refinanced and the loan rights were transferred by that financial institution to the Federal Government, with Banco do Brasil acting as an agent. Under the terms of the agreement signed with the Federal Government, payments are made based on the “Price” amortization system, monthly indexed by the Standard Reference Unit (UPR), which is equal to the Government’s benchmark Interest Rate (TR), plus interest of 8.5% per year. The interest and principal amount are monthly paid with final maturity in 2014. This financing is guaranteed by the São Paulo State Government by a pledge of its own revenues and revenues of the Company.

(b) Debentures

(i) 6th Issue

On September 17, 2004, the Company registered with CVM a securities program in the total amount of R$1,500,000. As part of this program, the Company issued on September 1, 2004, 600,000 debentures in three series, without renegotiation, with a face value of R$1 each, totaling R$600,000. The date for the financial settlement of the operation was September 21, 2004 for the 1st series and September 22, 2004 for the 2nd and 3rd series.

The debentures were placed on the market as follows:

Number Adjustment Interest Interest payment. Repayment Maturity 1st series 231,813 - CDI+1.75% p.a. Semiannual Single installment Sep 2007 2nd series 188,267 IGP-M 11% p.a. Annual Single installment Sep 2009 3rd series 179,920 IGP-M 11% p.a. Annual Single installment Sep 2010

Interest expenses totaled R$26,999 and R$23,290 in 2008 and 2007, respectively, related to the 2nd series, and R$25,802 and R$22,258, respectively, related to the 3rd series. The remaining balances to be paid, amounting to R$8,714 (2007 – R$7,366) for the 2nd series and R$8,328 (2007 – R$7,040) for the 3rd series, are recorded in ‘Loans and financing’ in current liabilities.

On September 3, 2007, the 1st series of the 6th issue of debentures was fully paid for.

(ii) 7th Issue

As part of the program registered with CVM on September 17, 2004, the Company issued 300,000 debentures in three series on March 1, 2005, without renegotiation, with a face value of R$1 each, totaling R$300,000. The date for the financial settlement of the operation was March 14, 2005.

The debentures were placed on the market as follows:

Adjustmen Interest Number t Interest payment. Repayment Maturity 1st series 200,000 - CDI+1.5% p.a. Semiannu Single Mar 2009 al installment 2nd series 100,000 IGP-M 10.80% p.a. Annual Single Mar 2010 installment

Interest expenses totaled R$27,171 and R$26,159 in 2008 and 2007, respectively, related to the 1st series, and R$13,444 and R$11,974,, respectively, related to the 2nd series. The remaining balances to be paid, amounting to R$9,861 (2007 - R$7,788) for the 1st series and R$11,128 (2007 – R$9,975) for the 2nd series, are recorded in ‘Loans and financing’ in current liabilities.

(iii) 8th Issue

To terminate the program registered with CVM on September 17, 2004, the Company issued on June 1, 2005, 700,000 debentures, using the option to increase the number of debentures allowed by up to 20%, pursuant to the provision of paragraph 2 of Article 14 of CVM Instruction No. 400/03,

F-142 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) distributed in two series, without renegotiation, with the face value of R$1 each, totaling R$700,000. The date for the financial settlement of the operation was June 24, 2005. The amount raised was used to settle the Eurobonds contract (note 12(g(i))).

The debentures were placed on the market as follows:

Adjustmen Interest Number t Interest payment. Repayment Maturity 1st series 350,000 - CDI+1.5% p.a. Semiannual Single Jun 2009 installment 2nd series 350,000 IGP-M 10.75% p.a. Annual Single Jun 2011 installment

Interest expenses totaled R$47,580 and R$45,744 in 2008 and 2007, respectively, related to the 1st series, and R$46,357 and R$40,496,, respectively, related to the 2nd series. The remaining balances to be paid, amounting to R$4,149 (2007 - R$3,187) for the 1st series and R$26,867 (2007 – R$23,444) for the 2nd series, are recorded in ‘Loans and financing’ in current liabilities.

(iv) 9th Issue

On October 23, 2008, the Company registered with CVM a securities program in the total amount ofR$3 billion and made a Public Offering of Simple Debentures, unsecured and non-convertible, of the 9th issue, in the context of the said program. The characteristics of the debentures are as follows:

1st series 2nd series

CVM registration CVM/SER/DEB/2008-029 CVM/SER/DEB/2008-030

Number 100,000 120,000

Issue date 10/15/2008 10/15/2008

Unit value (R$ thousand) R$1 R$1

Return DI plus 2.75% p.a. 12.87% p.a.

Monetary adjustment None IPCA

Payment of return Semiannual Annual

Final amortization * 10/15/2013 10/15/2015

Optional redemption From the 24th month From the 24th month

Repayments will be made in 3 annual and consecutive installments of the same amount, the first of which falling due on October 15, 2011 for the 1st series and October 15, 2013 for the 2nd series.

The date for the financial settlement of the operation was November 7, 2008 for the 1st series and November 10, 2008 for the 2nd series.

The funds arising from this issuance were used to refinance debts falling due.

Interest expenses incurred in 2008 totaled R$3,340 related to the 1st series and R$3,185 to the 2nd series, balances which are to be paid in the next year, and are recorded under in ‘Loans and financing’ in current liabilities.

Financial covenants of the 6th, 7th, 8th and 9th issue of debentures:

• Adjusted current liquidity (current assets divided by current liabilities, excluding from current liabilities the portion of noncurrent debts contracted by the Company that are recorded in current liabilities ) higher than 1.0.

F-143 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

• Ebitda/Financial expenses equal to or higher than 1.5. • The noncompliance with these obligations will only be characterized as such when they can be verified in the quarterly financial statements for at least two consecutive quarters or for two nonconsecutive quarters in the same twelve-month period.

Post-sanitation Program

(i) Water and sewage

Several loan agreements were signed between 1996 and 2004 under the Pro-Sanitation Program with a view to expanding and improving the water supply and sewage systems of several municipalities of the State of São Paulo and of the City of São Paulo. The loans are collateralized by the collections of the daily billings of water supply and sewage services up to the total amount of the debt.

Contractually established repayment terms range from 120 to 180 months, starting at the beginning of the related collections.

The balance as of December 31, 2008 is R$614,934 (2007 - R$527,669), and the unused amount of these loans is R$217,106.

The contractual charges are:

Contract signed in: 1996 1997 1998 to 2004

Interest rate 9.5% p.a. 6.5% to 8.0% p.a. 6.5% to 8.0% p.a.

During grace period: Risk rate 1.0% p.a. on the amount 1.0% p.a. on the 0.6% p.a. or 2% p.a. on disbursed amount disbursed the outstanding balance Management fee 0.12% p.m. on the 2.0% p.a. on the 1.0% p.a. on the amount contract amount amount disbursed disbursed or 2% p.a. on the amount disbursed for the contracts signed between 2003 and 2004 In the return phase:

Management fee Difference between the 1.0% on the debt 1.0% on the debt balance calculation of the balance installment and the rate of 10.5% p.a. less the rate of 9.5% p.a.

(ii) Pró-Sanear Program

In 1997, 1998 and 2008, contracts were signed under the Pró-Sanear Program for the improvement of water and sewage services, with the participation of the communities receiving the services, in several municipalities of the Metropolitan Region of São Paulo. The loans are collateralized by the collections of the daily billings of water supply and sewage services up to the total amount of the debt. Repayments will be made in 180 months after the beginning of collections. As of December 31, 2008, the balance is R$21,055 (2007 - R$21,502), and the amount available for use from these loans, for projects already in progress, is R$94,529.

The financial charges are:

Interest rate – 5.0% p.a. Management fee (grace period) – 2.0% p.a. on the outstanding balance Management fee (repayment phase) – 1.0% p.a. on the outstanding balance Risk rate (grace period) – 1.0% p.a. on the amounts disbursed

F-144 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

(iii) Growth Acceleration Program (PAC)

In 2007 and 2008, several contracts linked to the Sanitation Program (PAC) were entered with several municipalities, with funds from the Government Severance Indemnity Fund for Employees (FGTS). The contracts are guaranteed by a monthly flow of the billings corresponding to the minimum of three times the monthly charge. Repayments will be made in 240 months after the beginning of collections. The payment of the contracts has not begun, and the amount available for use is R$796,558. The financial charges are:

Interest rate – 6% p.a. Management fee – 1.05% p.a. during the period of the contract Risk rate – 0.3% p.a. on the adjusted debt balances.

Covenants:

• Through the Agreement for Performance Improvement, targets are established for financial indicators (operating margin, revenue evasion, cash and cash equivalents and reduction of the number of days accounts receivable are compromised), as well as operating indicators that, based on the past two years, are annually projected for the following five years.

The noncompliance with the covenants will accelerate the maturity of the contract.

(d) BNDES

Contract 01.2.619.3.1 – Signed in August 2002, in the total amount of up to R$60,000, for the purpose of financing part of the Company’s contribution to the Tietê River Pollution Abatement Project - Stage II, related to loan agreement 1212/OC - BR with the Inter-American Development Bank (IADB). The related project is in progress and the outstanding balance as of December 31, 2008 is R$42,367 (2007 – R$51,896).

The onlending agreement 10/669.748-6, in the total amount of R$180,000, is distributed among the financing agents as follows:

Agent Valor Unibanco – União de Bancos Brasileiros S.A. 60,000 Banco BBA Creditanstalt S.A. 51,000 Banco Alfa de Investimento S.A. 39,000 Banco Itaú S.A. 30,000 Total 180,000

The related project is in the performance stage and the outstanding balance as of December 31, 2008 was R$127,104 (R$155,697 in 2007). The funds are on lent from BNDES to the agents and from the latter to SABESP. The onlending agreement has the same purpose as the agreement between BNDES and SABESP, and the same interest and repayment terms, as follows:

Interest - TJLP limited to 6% p.a., plus a spread of 3% p.a., paid quarterly during the grace period, and monthly in the repayment phase. The TJLP portion exceeding 6% p.a. will be added to the outstanding balance.

Contract repayment was initiated in September 2005, with monthly payments and conclusion scheduled for February 2013.

The contracts are collateralized by part of revenues from the provision of water and sewage services.

Covenants:

• Current ratio: higher then 1.0; • Ebitda/Net Operating Revenue: equal or higher than 38%; • Total connections (water and sewage)/own employees: equal or higher than 520; • Ebitda/Debt Service: equal or higher than 1.5; • Shareholders’ Equity/Total Liabilities: equal or higher than 0.8.

The noncompliance with the covenants will accelerate the maturity of the contract.

F-145 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

(e) BNDES Santista lowland

In November 2007, the Company entered into a financing agreement with BNDES for the Environmental Recovery Program of the Santos Metropolitan Region, in the amount of R$129,973 with interest of 2.5% p.a. plus TJLP limited to 6%.

The first contract disbursement was made on September 26, 2008. Repayment will be made in 96 monthly and consecutive installments of the same amount, from January 2012 to December 2019.

A portion of the Company’s revenue is offered as guarantee for this financing.

The related program is in progress and the outstanding balance as of December 2008 is R$32,145.

(f) Receivables Investment Funds (FIDC)

On March 23, 2006, a single series of senior shares and 26 subordinated shares, held in a deposit account in the name of its holders, were issued with unit value on issue date corresponding to R$500. The senior shares are being repaid in 54 monthly installments, starting October 2006, and their final maturity is in March 2011. As of December 31, 2008, the balance of subordinated shares is R$18,177, recorded under the caption “Other receivables” in noncurrent assets; the balance of senior shares is R$125,000, recorded in ‘Loans and financing’. Subordinated shares were subscribed and paid up exclusively by SABESP. The Fund yield benchmark corresponds to 100% of the DI rate (a managed prime rate), plus a fixed interest coupon of 0.70% per base year of 252 business days, pursuant to the terms of its regulations.

The Fund is managed by Caixa Econômica Federal and its custodian and recording agent is Banco do Brasil S.A.

The funds raised, in the amount of R$250 million, were used by the Company to settle debts in 2006.

(g) Eurobonds

(i) In June 2003, the Company issued Eurobonds abroad (Eurobonds 2008) in the amount of US$225 million. The issue was led by The Bank of New York and the principal agent was The Bank of Tokyo Mitsubishi Ltd. The interest rate is 12% p.a., paid semiannually, and final maturity is in June 2008. The funds were used for the final settlement of the US$200 million Eurobond matured in July 2003.

On November 6, 2006, the Company settled in advance part of this loan, in the amount of R$272,811, with funds raised through the issue of Eurobonds (Eurobonds 2016) in the amount of US$140 million.

On July 2008, the Eurobond 2008 contract, in the amount of R$158,256 and R$9,495 related to interest for the period, was settled. The settlement was made with part of the AB loan.

(ii) On November 3, 2006, the Company issued Eurobonds abroad (Eurobonds 2016) in the amount of US$140 million. The issue was led by Deutsche Bank Trust Company Americas and the principal agent was Deutsche Bank Luxembourg S.A. The interest rate is 7.5% p.a., paid semiannually, and final maturity is in November 2016. As mentioned in (i) above, the funds raised were used to partially settle in advance US$225 million in the Eurobonds issued, with final maturity in June 2008, and the amount redeemed was US$126,948,000.

Due to the payment in advance of Eurobonds 2008, an amendment to the loan agreement was signed cancelling the mandatory calculation of covenants.

Covenants – for Eurobonds 2016. Limitation against incurring new debt so that: . total debt adjusted to EBITDA does not exceed 3.65 . the Company’s debt service coverage ratio, determined on the date this debt was incurred, shall not be lower than 2.35.

The noncompliance with the covenants will accelerate the maturity of the contract.

F-146 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

(h) Inter-American Development Bank (IADB)

Loan Agreement 713 - In December 1992, the Company entered into a loan agreement with the IADB for US$400 million to finance the first stage of the Tietê River Pollution Abatement Project. The repayment period started in June 1999 in semiannual installments, subject to annual floating rate interest, varying according to the loans raised by the Bank in each six-month period, and of final maturity in December 2017. In December 1992, the Federative Republic of Brazil signed a guarantee contract with the IADB guaranteeing the funds for the fulfillment of the contractual obligations. The outstanding balance as of December 31, 2008 was US$215,310,000, R$503,179 (2007 - R$397,990).

Loan Agreement 896 – In December 1992, the Company signed a loan agreement with the IADB for US$50 million to finance the first stage of the Tietê River Pollution Abatement Project. Semiannual repayments started in June 1999, with annual interest of 3% and final maturity in December 2016. In December 1992, the Federative Republic of Brazil signed a guarantee contract with the IADB guaranteeing the funds for the fulfillment of the contractual obligations. The outstanding balance as of December 31, 2008 was US$22,222,000, R$51,933 (2007 - R$44,282).

Loan Agreement 1212 – In July 2000, the Company signed a loan agreement with the IADB for US$200 million to finance the second stage of the Tietê River Pollution Abatement Project. In 2008, total disbursement for this agreement was US$2,434,000 and there are no amounts to be disbursed. The loan is being repaid semiannually and final maturity is July 2025. Interest is being paid on a semiannual basis, based on daily balances, at an annual variable rate according to the costs of loans of the Bank in the preceding six-month period, plus a spread, and changes every six months. The outstanding balance as of December 31, 2008 was US$174,728,000, R$408,339 (2007 - R$323,105).

The noncompliance with the covenants will accelerate the maturity of the contract.

(i) Japan Bank For International Cooperation (JBIC)

On August 6, 2004, the Company entered into a financing agreement with the JBIC – Japan Bank For International Cooperation, guaranteed by the Federal Government, in the amount of ¥21,320 million, equivalent to approximately R$337,687, for the Environmental Recovery Program of the Santos Metropolitan Region. Total financing period is 25 years, with a seven-year grace period and 18 years of repayment in semiannual installments. Interest is being paid on a semiannual basis since 2006, and is 2.5% p.a. for the sewage network and 1.8% p.a. for sewage treatment facilities. The balance of this loan agreement as of December 31, 2008 was R$390,015 (2007 – R$42,043).

(j) AB Loan (IADB 1983AB)

On May 27, 2008, the Company signed a loan agreement AB loan with IADB, in the amount of US$250,000,000.00, which was fully disbursed in June 2008. The funds obtained were used to settle Eurobonds 2008 and to partly perform the Company’s investment plan.

The characteristics of this loan agreement are as follows:

US$ Initial maturity Final maturity Interest ( Libor + spread)

1983 A 100,000,000.00 May 2011 May 2023 2.595%+2.375%

1983 B1 100,000,000.00 May 2011 May 2020 2.595%+2.075%

1983 B2 50,000,000.00 May 2011 May 2018 2.595%+1.875%

Interest is being paid on a semiannual basis since November 2008.

F-147 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

The balance of this loan agreement as of December 31, 2008 was US$250,000,000, R$584,250, net of part of the borrowing costs, in the amount of R$3,655, which will be repaid over the period of the agreement.

(k) Covenants

As of December 31, 2008 and 2007, the Company had met all the requirements set forth by its loan and financing agreements.

(l) Maturities of loans and financing

2009 2010 2011 2012 2013 2014 2015 and TOTAL thereafter In local currency 1,342,698 843,019 919,952 500,093 537,949 189,628 250,786 4,584,125 In foreign currency 106,162 86,420 151,994 163,149 163,149 163,149 1,446,960 2,280,983

Grand Total 1,448,860 929,439 1,071,946 663,242 701,098 352,777 1,697,746 6,865,108

13. DEFERRED TAXES

Balance sheet balances

COMPANY AND COMPANY CONSOLIDATED

2008 2007 In current assets (i) Deferred income tax 125,722 79,994 Deferred social contribution 45,260 28,798 170,982 108,792 In noncurrent assets (ii) Deferred income tax 320,104 260,847 Deferred social contribution 115,237 96,379 435,341 357,226 In current liabilities (iii) Deferred income tax 209 - Deferred social contribution 75 - Deferred PASEP 19,296 21,507 Deferred COFINS 44,789 53,742 64,369 75,249 In noncurrent liabilities (iv) Deferred income tax 59,468 66,909 Deferred social contribution 16,899 19,578 Deferred PASEP 17,656 19,128 Deferred COFINS 47,469 54,250 141,492 159,865 In income statement Income tax (399,194) (395,634) Deferred income tax 112,216 82,075 (286,978) (313,559) Social contribution (149,179) (147,711) Deferred social contribution 37,924 29,702

F-148 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

(111,255) (118,009) (i) In current assets

Calculated mainly based on temporary differences in the amount of R$502,889 (2007 – R$319,977).

(ii) In long-term assets

Calculated mainly based on temporary differences in the amount of R$1,280,413 (2007 – R$1,043,388) for income tax, and R$1,280,413 (2007 – R$1,070,876) for social contribution tax.

The Company’s management expects the realization of the long-term balance mentioned in item (ii) in 2010, in the same proportion as 2009, and the remaining balance to be realized in 2011.

(iii) Current liabilities

- Income tax and social contribution Calculated mainly based on temporary differences in the amount of R$837 for income tax and social contribution.

- PASEP and COFINS

(iv) In noncurrent liabilities

- Income tax and social contribution

Calculated mainly based on temporary differences in the amount of R$237,872 (2007 – R$267,636) for income tax, and R$187,766 (2007 – R$217,530) for social contribution tax.

- PASEP and COFINS

(b) Breakdown of deferred taxes

COMPANY AND CONSOLIDATED COMPANY In current assets 2008 2007 Reserves for contingencies 170,982 108,792

In long-term assets Reserve for contingencies 240,493 225,697 Reserve for social security liabilities 139,616 121,039 Other 55,232 10,490 435,341 357,226

F-149 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

Total deferred tax assets 606,323 466,018

In current liabilities Costs of issuance of securities 284 - Revenue – government entities 64,085 75,249 64,369 75,249 In noncurrent liabilities Costs of issuance of securities 1,997 - Income – government entities 74,370 86,487 Revenue – government entities 65,125 73,378 141,492 159,865 Total deferred tax liabilities 205,861 235,114

COMPANY AND CONSOLIDATED COMPANY 2008 (Adjusted, see note 2) 2007

Pre-tax income 461,804 1,486,831 Statutory rate 34% 34% Estimated expenses at statutory rate (157,013) (505,523) Permanent differences Realization of revaluation reserve (29,518) (29,808) Law 4819/58 adjustments (i) (321,135) - Interest on capital 100,704 102,253 Other differences 8,729 (721) Adjustments from adoption of Law 11638/07 - 2,231 Income tax and social contribution (398,233) (431,568)

Current income tax and social contribution (548,373) (543,345) Deferred income tax and social contribution 150,140 111,777 Effective rate 86% 29%

(i) Permanent difference considered by management related to the allowance for losses on the disputed reimbursement of benefits under Law 4819/58 and corresponding reserve related to the actuarial obligation (note 7 (vii)).

(d) Transition Tax Regime (RTT)

The Company opted to adopt the Transition Tax Regime (RTT), established by Provisional Measure 449/08. Accordingly, the effects from the changes in Law 11638/07 and from articles 36 and 37 of the said Provisional Measure had no effects for tax purposes. Due to the adoption of this regime, the Company maintained the tax incentives arising from donations and government subsidies to investments and the tax deductibility for costs on issuance of securities, which are now recorded as a reduction of the accounts payable.

14. TAXES PAYABLE

Current Noncurrent 2008 2007 2008 2007 Income tax 3,742 4,420 - - Social contribution 6,114 5,331 - -

F-150 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

COFINS and PASEP (taxes on revenue) 37,766 41,629 -- PAES (tax debt refinancing program) 32,631 43,918 114,210 197,635 INSS (Social Security contribution) 21,406 20,072 -- Other 28,750 12,365 - - Total 130,409 127,735 114,210 197,635

Tax Principal Fine Interest Total

COFINS 132,499 13,250 50,994 196,743 PASEP 5,001 509 2,061 7,571 REFIS 112,639 - - 112,639 Total 250,139 13,759 53,055 316,953

The debit is being paid in 120 months. The amounts paid in 2008 and 2007 were R$34,114 and R$43,002 respectively, and financial expenses of R$8,281 and R$12,218, respectively, were recorded. The outstanding balance as of December 31, 2008 was R$146,842. The assets offered as guarantee in REFIS, in the amount of R$249,034, are still guaranteeing the amounts in the PAES program. As a result of the appropriateness of the calculation of interest related to the refinancing, the outstanding balance was reduced by approximately R$66,000.

15. PENSION PLAN OBLIGATIONS

(a) Welfare plan

Company: 7.1% (2007 – 7.2%) on average, of gross payroll; Participating employees: 3.21% of base salary and premiums, equivalent to 2.3% of gross payroll, on average.

(b) Pension plan benefits

Based on independent actuarial reports as of December 31, 2008, calculated in conformity with the Projected Unit Credit Method, SABESP had a net actuarial liability of R$419,871 (R$365,234 in 2007) representing the difference between the present value of the Company’s obligations to the participating employees, retired employees, and pensioners, and the value of the related assets, as shown below:

COMPANY AND CONSOLIDATED COMPANY (i) Reconciliation of assets and liabilities 2008 2007

Present value of actuarial liabilities (1,433,710) (1,386,563) Fair value of assets 976,545 969,440 Gains to be recognized in future years

F-151 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

37,294 51,889 Net liability (419,871) (365,234) Net liability recognized in balance sheet (419,871) (365,234)

(ii) Expenses recognized in the statement of income

Cost of current service 33,347 33,440 Cost of interest 164,124 131,848 Expected return on plan assets (117,317) (96,439) Employee contributions (13,025) (12,925) Total 67,129 55,924

(iii) Changes in net actuarial liabilities

Present value of the net actuarial liability in the (365,234) (321,212) beginning of the year Cost of current service (33,347) (33,440) Cost of interest (164,124) (131,848) Expected return on plan assets 117,317 96,439 Employee contributions 13,025 12,925 (432,363) (377,136) Actual contributions by the Company in the year 12,492 11,902 Present value of the net actuarial liability at (419,871) (365,234) yearend

(iv) Changes in the fair value of assets

Fair value of plan assets at beginning of year 969,440 812,909 Actual return on plan assets 40,723 183,748 Actual contributions in the year 25,517 24,827 Benefits paid (59,135) (52,044) Fair value of plan assets at end of year 976,545 969,440

(v) Change in the present value of obligations

Present value of obligations at beginning of year 1,386,563 1,096,219 Cost of current service 33,347 33,440 Cost of interest 164,124 131,848 Benefits paid (59,135) (52,044) Loss on present value of obligations (91,189) 177,100 Present value of obligations at end of year 1,433,710 1,386,563

(vi) Expected expenses 2009 2008

Cost of current service 31,116 33,347 Cost of interest 155,514 164,124 Expected return on plan assets (92,309) (117,317) Employee contributions (21,235) (13,025) Total 73,086 67,129

(vii) Actuarial assumptions

F-152 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

The assumptions used for the actuarial valuation were as follows:

Economic assumptions 2008 2007

Discount rate 10.85% p.a. 10.85% p.a. Expected rate of return on assets 10.85% p.a. 10.85% p.a. Future salary increase 6.08% p.a. 6.08% p.a. Growth in social security benefits and limits 4.00% p.a. 4.00% p.a. Capacity factor - Salaries 98% 98% - Benefits 98% 98% Demographic assumptions for 2008 2007 Mortality table AT 83 AT 83 Disability mortality table RRB 44 RRB 44 Disability table RRB 44 RRB 44 Turnover table Prudential Prudential Retirement age First age with First age with entitlement to entitlement to one of the one of the benefits benefits % active participants married at time of retirement 95% 95% Age difference between participants and their spouses Wives are 4 Wives are 4 years younger years younger than husbands than husbands

The number of active participants as of December 31, 2008 was 15,448 (15,881 in 2007). The number of inactive participants as of December 31, 2008 was 4,579 (4,245 in 2007).

The evaluation of SABESPREV costing plan is made by an independent actuarial expert, based on different assumptions than those adopted for purposes of ascertaining benefits to employees, as set forth in CVM Resolution 371. SABESPREV’s technical deficit as of December 31, 2008 is R$500,266 (2007 - R$319,463). The calculation is substantially different as for the actuarial method in calculating risk benefits before retirement, with sharing to SABESPREV and capitalization for the purpose of meeting CVM Resolution 371.

As described in note 7, the Company is paying, under a court decision, former employees’ pension and survivors’ benefits.

As established by Law 4819/58, the benefit plan includes supplementing official social security pensions, supplementing permanent disability pensions, and supplementing survivors’ benefits.

This benefit plan does not receive any contributions from the plan managed by SABESPREV and, therefore, there is no guarantying asset.

As of December 31, 2008, based on an independent report, the actuarial commitment related to the future payment of benefits was R$1,338,587. The actuarial reserve recognized was R$535.4 million and corresponds to the disputed reimbursement of this liability not reimbursed by the State.

The number of active participants as of December 31, 2008 was 2,801. The number of beneficiaries, retirees, and survivors as of December 31, 2008 was 2,658. The other assumptions used in the actuarial calculation are described above.

16. PROFIT SHARING

F-153 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

As a result of negotiations held by the Company with entities representing the employees, a Profit Sharing Program was implemented, and it was considered the period from January to December 2008, with the payment of the amount corresponding to up to one month’s payroll, depending on achievement of targets. In 2008, the company accrued R$53,216.

17. RESERVES FOR CONTINGENCIES

(a) Lawsuits with probable likelihood of loss

The Company is party to a number of claims and legal proceedings arising in the normal course of business, including civil, tax, labor and environmental matters. Management, based on a jointly analysis with its legal advisors, recognized reserves at an amount considered sufficient to cover probable losses. These reserves, net of escrow deposits, are as follows:

COMPANY AND CONSOLIDATED COMPANY Description 2008 2007

Customer claims (i) 659,875 504,028

Supplier claims (ii) 222,372 171,656

Other civil claims (iii) 152,446 125,627

Tax lawsuits (iv) 26,291 32,123

Labor lawsuits (v) 41,222 61,747

Environmental lawsuits (vi) 55,442 50,075

Total 1,157,648 945,256

Current 459,395 290,172 Noncurrent 698,253 655,084

Changes to the reserves for contingencies for the year ended December 31, 2008 are shown below:

Interest, inflation adjustment and 2007 Additions Deductions reversals 2008 Customer claims 526,302 173,280 (86,313) 83,319 696,588 Supplier claims 174,556 36,711 (38,074) 52,162 225,355 Other civil claims 127,890 42,360 (36,475) 22,469 156,244 Tax lawsuits 34,491 4,890 (12,805) (285) 26,291 Labor lawsuits 61,747 19,722 (39,237) (1,010) 41,222 Environmental lawsuits 50,075 22,599 (25,707) 8,475 55,442 Subtotal 975,061 299,562 (238,611) 165,130 1,201,142 Judicial deposits (29,805) (30,328) 21,021 (4,382) (43,494) Total 945,256 269,234 (217,590) 160,748 1,157,648

(b) Lawsuits with possible likelihood of loss

The lawsuits in course in administrative and judicial levels, in different courts, where the Company is the defendant, considered by its legal advisors of possible likelihood of loss, not being, for this reason, provisioned in the financial statements, are distributed as follows:

F-154 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

COMPANY AND CONSOLIDATED COMPANY 2008 2007 Customer claims (i) 653,700 709,000 Supplier claims (ii) 388,100 254,100 Other civil claims (iii) 228,100 195,300 Tax lawsuits (iv) 259,000 199,900 Labor lawsuits (v) 115,600 70,400 Environmental lawsuits (vi) 25,200 514,400 Total 1,669,700 1,943,100

(i) Customer claims Approximately 1,200 lawsuits were filed by commercial customers, which claim that their tariffs should be equal to the tariffs of another consumer category, and therefore claim the refund of the amounts collected by SABESP. The Company was granted both favorable and unfavorable final decisions at several courts, and recognized a reserve when the likelihood of loss is considered probable. The change of R$170,286 in the lawsuits classified as probable loss arose from the change in the likelihood of ongoing lawsuits, interest, fees and adjustments.

(ii) Supplier claims Suppliers’ claims include lawsuits filed by some building companies alleging an underpayment of monetary adjustments, withholding of amounts related to the understatement of official inflation rates after the Real economic plan, and the economic and financial imbalance of the agreements. These lawsuits are in progress at different courts and a reserve is recognized when the likelihood of loss is considered probable. The R$134,000 increase in lawsuits whose likelihood of loss is considered possible is related to the change in the likelihood of the lawsuits, interest, fees and inclusion of monetary adjustment.

(iii) Other civil claims The Company is a party to several civil lawsuits related to indemnities for property damage, pain and suffering, and loss of profits allegedly caused to third parties. As of December 31, 2008, the Company recognized provisions of R$156,244 (R$127,890 in 2007) for claims whose likelihood of loss is considered probable. There was an increase both in lawsuits with probable and possible risk of loss, arising from the increase in lawsuits and the review of the expected outcomes, comprising monetary adjustment, interest and fees for the year.

(iv) Tax lawsuits

The reserve for tax contingencies refers mainly to issues related to tax collections challenged due to differences in the interpretation of legislation by the Company’s legal advisors.

In 2006, the Federal Revenue Service, by means of a tax execution, audited the Company’s compliance with the tax obligations related to income tax and social contribution for calendar 2001, and recognized taxes payable in the amount of R$277 million (R$322 million adjusted through December 31, 2008). The Company filed a timely objection and will appeal against the tax assessment at administrative level and in courts. According to its legal advisors, the likelihood of loss in approximately 90% of this administrative proceeding is considered remote and 10% possible.

In 2005, the Federal Revenue Service partially rejected the offset request made by the Company for the extinction of the Corporate Income Tax (IRPJ) payable, in the amount of approximately R$56.1 million, and of the Social Contribution on Net Income (CSLL) payable, in the amount of approximately R$8.7 million, as of the determination period from January to April 2003, using prior year IRPJ and CSLL negative balances. In the final order, the authority did not ratify the equivalent to R$11.2 million related to IRPJ and R$0.7 million related to CSLL, totaling approximately R$11.9 million (R$24.1 million adjusted through December 31, 2008). Our legal advisors assessed it has a possible loss.

In 2008, the Federal Revenue Service rejected six offset requests made by the Company for the extinction of IRPJ/CSLL payable, using favorable amounts, arising from undue payments of

F-155 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

IRPJ/CSLL, which were paid based on monthly estimates. The amount involved is estimated at R$28 million adjusted through December 31, 2008). Our legal advisors assessed it has a possible loss.

The company filed for a preliminary injunction to challenge the revocation of the exemption from tax service granted by the Municipality of São Paulo, under a City Law enacted in 2002. In April 2003, the exemption request was granted under an injunction determining the suspension of tax payments. In May 2005, the courts issued a decision overruling the injunction. In July 2005, SABESP filed an appeal to ensure the preliminary injunction granted remained in effect. There is no final decision on the lawsuit, and the likelihood of loss is considered possible. Concurrently, on September 18, 2006, the São Paulo Municipal Finance Department issued a tax deficiency notice, against which the Company filed timely administrative objection, with subsequent rejection of the appeal filed with lower courts. The Company filed a timely ordinary appeal with the Municipal Tax Council which was not accepted and a writ of prevention was filed against this decision, with an injunction, for the purpose of annulling the decision. The amount involved is estimated at R$70.0 million (R$135 million as adjusted through December 31, 2008). Our legal advisors assessed it has a possible loss.

The Company filed lawsuits against the Municipalities of Bragança Paulista and São Paulo due to the collection of a charge on the use of public areas to install water and sewage networks used for the water supply and sewage services provided to these municipalities. In the lawsuit filed against the Municipality of Bragança Paulista, the Company was granted a preliminary injunction related to this charge and preventing the municipality from collecting any current or future amounts related to such charge until there is a final decision on the merit of the lawsuit. In June 2005, the lower court decided favorably to the Company and the initial remedy was maintained. The municipality appealed against the decision, which is awaiting judgment by the Court of Appeals. As regards the lawsuit filed against the Municipality of São Paulo, the lower court issued a decision confirming the legality of the municipal charge. The Company filed an appeal and awaits judgment. Subsequently, a new Law was approved to implement the collection of a charge on the use of public areas in the city of São Paulo. In April 2004, the Company filed for an injunction to suspend the collection of the municipal charge. The injunction was granted by the lower court and confirmed when the decision was issued, which recognizes the charge as undue. The municipality filed an appeal and is awaiting judgment by the Court of Justice. Our legal advisors assessed this risk as a possible loss.

(v) Labor lawsuits The Company is a party to labor lawsuits, involving issues such as overtime, health hazard premium and hazardous duty premium, prior notice, change of function, salary equalization, and other. Part of the amount involved is in provisional or final execution at various court levels, and thus is classified as of probable loss and accordingly a provision was recognized.

(vi) Environmental lawsuits These refer to public civil actions brought against us by the São Paulo State Public Prosecution Office, certain municipalities and certain non-governmental organizations, mostly environmental public civil actions seeking the following: (1) to forbid the dumping of raw sewage into certain local watercourses; (2) in some cases seeking remedies for environmental damages, which have not yet been specified and evaluated by technical experts of the courts; and (3) aiming to require us to install and operate sewage treatment facilities in those locations.

The public civil actions to which we are party include the following: (a) The Public Prosecution Office of the São Bernardo do Campo judicial district has brought a public civil action requesting remedies due to environmental damage caused by the release of sludge from our water treatment facility ETA-Rio Grande into certain receiving waters; seeking the immediate cessation of this activity and the implementation of an environmental recovery project. The appellate court ruled against us and ordered that the dumping of residue cease within one year from the final ruling. The court also determined that environmental recovery must be carried out within two years of the date mentioned above, under the penalty of a daily fine of R$10,000.00 and conversion into compensation for environmental damages. The Company is awaiting ruling on the new appeal filed. The Company’s legal advisors assessed the risk of loss as probable and recognized a reserve which reflects the amount attributed to this lawsuit; (b) Public civil action filed by the Public Prosecution Office against us and the Cotia Municipality seeking individual and joint sentencing of the defendants to: (i) the permanent cessation of releasing

F-156 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) untreated water effluents into the Cotia River or its tributaries, subject to a daily fine in the case of noncompliance;(ii) the treatment of sewage prior to releasing it into the Cotia River, under the penalty of a daily fine, in the event of noncompliance;(iii) the full restoration of soil, of surface and underground water bodies and of vegetation to their original condition, under the penalty of a daily fine, in the event of noncompliance; and(iv) the payment of compensation for environmental damages caused to soil, to water sources and to underground and surface water bodies that cannot be recovered. The appellate court rendered favorable decisions to us with respect to items (i), (iii) and (iv) above. According to evaluations by the court’s technical expert, compensation for environmental damages was R$826,800.00 or, alternatively, R$5.8 million as of October 17, 2006. This amount is still under discussion and its approval is subject to a final decision by the court. Our in-house legal counsel assessed it as a probable loss. In December 2008, the total adjusted provision was R$7.4 million. The lawsuit is in final execution. SABESP is discussing with the Public Prosecution Office seeking a settlement; (c) Public civil action filed by the São Paulo Public Prosecution Office against us and the municipality of Itupeva, Campo Limpo Paulista e Várzea Paulista seeking 1) the condemnation of the defendants for the obligation not to discharge untreated household sewage into the Atibaia river, which is not in compliance with the quality standards provided for in law, under the penalty of specific execution or a daily fine; 2) compensation for environmental property and moral damages in the amount of R$2.0 million and daily fine in the amount of R$1,000.00 for each of the municipalities jointly involved with SABESP. The injunction was granted. The decision was unfavorable to the defendants partly establishing the obligation not to discharge untreated household sewage into the Jundiaí river under the penalty of a daily fine of R$1,000.00 with payment terms set forth in the preliminary injunction; compensation for property damage to be determined at the time the decision is settled. SABESP is awaiting ruling on the appeal filed. The Public Prosecution Office is settling the decision, which is undergoing an expert examination. Our in-house legal counsel assessed it as a probable loss. The adjusted amount of the claim is R$4.5 million; (d) Public civil action filed by the Public Prosecution Office against SABESP seeking to establish the obligation not to discharge sewage into the Cascavel river or other stream bed, in the Municipality of Echaporã, under the penalty of a daily fine of 200 minimum salaries and compensation for environmental, the amount of which shall be determined upon expert examination. The lower court decided unfavorably to the Company, based on an expert report, which presented estimated damages in the amount of R$352,000.00 in July 2000. The decision was maintained by the Court of Justice, and the Company is awaiting judgment by the higher courts. Our in-house legal counsel assessed it as a probable loss. The amount related to the expert examination work plus the penalty fine totals R$11.0 million; (e) Public civil action filed by the São Paulo Public Prosecution Office against us requesting the court to sentence the Company to 1) terminate of releasing untreated water effluents into the Capivari River and its tributaries, in the Municipality of Campos do Jordão, within 540 days from the filing of the lawsuit, subject to a daily fine of R$100,000.00. 2) Ensure the full environmental recovery due to environmental damage or monetary compensation in case the recovery is proven unfeasible. The decision was unfavorable to SABESP, which filed an appeal. The court sustained the decision, and the fine in the event of noncompliance was changed in R$10,000.00. SABESP is awaiting ruling on the extraordinary appeal filed. Our in-house legal counsel assessed it as a probable loss. The fine adjusted through December 31, 2008 corresponds to R$4.7 million; (f) Public civil action filed by the São Paulo Public Prosecution Office against SABESP and the Municipality of Piracaia seeking conviction of the defendants for the obligation not to discharge untreated household sewage into the Atibaia river, which is not in compliance with the quality standards provided for in law, under the penalty of specific execution or a daily fine. The amount attributed to the lawsuit was R$3.5 million, as of July 11, 1996, adjusted to R$8.7 million through December 31, 2008. This lawsuit is awaiting ruling at the lower courts. Our legal advisors assessed it has a possible loss; (g) Public civil action brought against SABESP, AES Eletropaulo, Daee, Cetesb and Finance Department of the São Paulo State for the alleged environmental damages caused because of the inversion of the Pinheiros River stream to the Billings Dam. The lower court decision, based on an experts’ report that estimated damages at R$285 million, jointly convicted the parties to pay this amount, monetarily adjusted since June 2000 through December 2008, totaling R$527 million. The parties filed an appeal against the decision and, on March 17, 2009, SABESP was granted a favorable decision by the Appeal Court. Our legal advisors assessed it has a remote loss;

F-157 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

(h) In 2003, a public civil action filed by the Piracicaba Civil Entities Coordination Board against SABESP and the National Water Agency seeking remedy for damages caused by the use of the Piracicaba, Jundiaí and Capivari rivers’ basin to supply the São Paulo Metropolitan Region through the Cantareira Water System for nearly 30 years. The amount attributed to the lawsuit was R$11.4 billion, as of December 10, 2003, adjusted to R$16.1 billion as of December 31, 2008. This lawsuit is in its initial stage and is pending judgment from the lower court. So far no value has been set for the alleged damages. Our legal advisors assessed it has a remote loss.

The Company is a party to other environmental lawsuits in municipalities where it operates, arising from the discharge of untreated waste, assessed as probable and possible risks of loss by its legal advisors. The amounts recognized in reserves do not always represent the final amount to be disbursed as indemnity of alleged damages, in view of the current stage in which the such lawsuits are and management’s ability to reasonably estimate the amounts of future disbursements. As of December 31, 2008, total provision represents the R$55,442, already including the amounts referred to in items (a), (b), (c), (d) and (e).

(vii) Settlements reached in 2008 a) On January 2008, the Company reached a settlement with the Public Prosecution Office for the construction of the Domestic Sewage Treatment System facilities in the municipality of Boituva within 54 months as from the signature of the settlement, estimated at R$12.8 million. From this amount, R$3.9 million will be built by municipality agreement and the remaining R$8.9 million will be the responsibility of SABESP. In addition, Environmental memorandum account was provided for with the planting of 5,000 seedlings. The settlement was ratified by the court. b) In January 2008, the Company reached a settlement with the Public Prosecution Office for the construction of the Domestic Sewage Treatment and Deviation System facilities in the municipality of Santa Cruz do Rio Pardo and Environmental Compensation for the recovery of riverbank forest of the Mandaguari River, which total R $1.3 million. The start of the riverbank forest recovery project is scheduled for February 2008, to be completed by February 2012. The settlement was ratified by the court. c) In July 2008, the Company reached a settlement with the State Public Prosecution Office for the construction of the Domestic Sewage Treatment and Deviation System facilities in the Municipality of Bragança Paulista through December 31, 2011, in the total amount of R$51.9 million, and for Environmental Compensation in the amount of R$4.2 million through December 31, 2014. Note that the settlement was ratified by the court. d) In December 2008, the Company reached a settlement with the State Public Prosecution Office for the implementation of the Sewage Treatment system in the Municipality of Lutécia in the total amount of R$1.3 million, and for Environmental Compensation in the amount of R$963,000. Note that the settlement has already been ratified by the court. e) In December 2008, the Company reached a settlement with the State Public Prosecution Office for the implementation of actions related to Environmental Compensation in the Municipality of Borá in the amount of R$640,000. Note that this settlement is pending ratification by the court. f) In October 2008, the Company reached a settlement with the State Public Prosecution Office for the construction of the Domestic Sewage Treatment and Deviation System facilities in the Municipality of Itaquaquecetuba through December 31, 2019, in the total amount of R$245.8 million and for Environmental Compensation in the amount of R$250,000. Note that this settlement is pending ratification by the court.

(viii) Other concession-related legal proceedings

In December 2, 1997, the municipality of Santos enacted a law expropriating our water and sewerage mains in Santos. We requested an injunction against the expropriation which was denied by the lower court. This decision was subsequently reversed by the State of São Paulo appellate court, which then issued an injunction suspending the law. The Company was granted a favorable decision at the lower court, and the municipality of Santos appealed against the decision. Although the decision was maintained by the Court of Justice, it is not final. Despite the pending action, the Company is operating the water supply and sewage collection systems in the municipality of Santos.

F-158 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

The municipality of Itapira revoked the concession contract and filed an action against us seeking to repossess the assets related to its water and sewage services, the outcome of which was unfavorable to the Company. We appealed the decision but, in view of the compensation lawsuit filed against the aforementioned municipality we have waived the appeal.

The municipality of Tuiuti has brought a declaratory action seeking to recognize the inexistence of any judicial or legal grounds to justify our permanence as the provider of water supply and sewage collection services in the municipality of Tuiuti, and the subsequent taking over of these services by the municipality. We responded with a counterclaim against the municipality seeking a statement corroborating the existence of a legal relationship between the two parties for subsequent compensation for investments made. The lawsuit is in the fact-finding phase.

The municipality of Cajobi has filed a Repossession Action. This seeks the retaking of water supply and sewage collection services. The action also seeks to require us to pay for losses and damages for amounts received as water and sewage tariffs not received in view of utilities explored since the enactment of the Municipal Decree, and for the use of assets related to the concession. The municipality of Tuiuti has been the provider of water supply and sewage collection services since May 29, 2007, as a result of the favorable decision granted to the interlocutory appeal.

The municipality of Monte Alto has brought a cumulative Repossession Action for losses and damages stating the termination of the concession contract entered into with us and seeking the retaking of water supply and sewage collection services. The injunction was granted. SABESP has retaken the operation of the said services in June 2008 after an agreement between the parties, which is pending homologation by the competent judge, as regards to legal fees.

The municipality of Araçoiaba da Serra has brought a Repossession Action seeking an authorization to enter into the installations included in the concession contract, including all property and assets connected to the water supply and sewage treatment services. In addition to this, the municipality seeks to take over the administration, operation and exploration of these services in view of the expiration of the concession contract, scheduled for September 23, 2006. The municipality also claims the definitive restoring of the service’s ownership, including due reversal of all assets, rights and privileges previously transferred to us. The request for an injunction seeking to keep the municipality in charge of the services was initially granted and is maintained by the appellate court. We have subsequently filed for an injunction to require the early production of evidence. The lawsuit is in the fact-finding phase.

On December 31, 2008, the lawsuits brought by the municipalities of Itapira, Cajobi, Monte Alto and Araçoiaba da Serra totaled approximately R$11 million and our in-house counsel has considered them as a possible loss.

18. SHAREHOLDERS' EQUITY

(a) Authorized capital

The Company is authorized to increase capital up to R$10,000,000, based on a Board of Directors’ resolution, after submission to the Supervisory Board.

(b) Subscribed and paid-in capital

Subscribed and paid-up capital is represented by 227,836,623 registered common shares, without par value, held as follows:

F-159 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

______2008 ______2007 Shareholders ______Number of shares % Number of shares %

State Finance Department 114,508,086 50.26 114,508,087 50.26 Companhia Brasileira de Liquidação e Custódia 54,336,892 23.85 61,690,601 27.08 The Bank Of New York ADR Department (equivalent in shares)(*) 58,769,102 25.79 51,409,636 22.56 Other 222,543 0.10 228,299 0.10 227,836,623 100.00 227,836,623 100.00 (*) each ADR is equal to 2 shares

The mandatory minimum dividends are calculated as follows:

Net income for the year 63,571 (-) Legal reserve 5% 3,178 (-) Donations 25,780 Net income 34,613 Mandatory minimum dividend 8,653

In 2008, the Company accrued interest on shareholders’ equity attributed to dividends in the amount of R$274,990 net of withholding income tax in the amount of R$21,198. In 2007, the amount was R$279,494 net of withholding income tax in the amount of R$21,250. Interest on shareholders’ equity was calculated in conformity with article 9 of Law 9249/95, at the Long-term Interest Rate (TJLP); this interest was originally recorded in “Financial expenses” for income and social contribution tax deductibility purposes and subsequently, for presentation purposes, was reflected in “Shareholders’ equity”.

(d) Capital reserve

The capital reserve includes tax incentives.

(e) Revenue reserves (adjusted, see note 2)

(i) Allocation of net income for the year 2008

Net income for the year 63,571 (+) Realization of revaluation reserve 86,817 (-) Interest on capital 296,188 (-) Legal reserve 5% 3,178 (Absorption of accumulated losses) Reserve for investments (148,978)

(ii) Reserve for investments

Comprised specifically of own funds for expansion of water supply and sewage service systems.

19. INSURANCE COVERAGE

F-160 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

Insurance policies held by the Company provide the following coverage, taking into account the risks and nature of the related assets, as follows:

Type of insurance__ Insured amount – R$ Premium (*) (*) Engineering risk 347,517 823 Fire 336,086 223 Civil liability - officers and employees 80,000 1,690 Civil liability - construction in progress 14,084 475 Civil liability - operations 3,000 167

(*) Unaudited information The Company does not have an environmental and loss of profits insurance.

20. FINANCIAL INSTRUMENTS AND RISK

(a) Identification and valuation of financial instruments

The Company operates with many financial instruments, particularly cash and banks, including financial investments, and loans and financing as described below.

In 2008 and 2007, the Company did not carry out transactions involving derivatives.

(i) Cash and cash equivalents, accounts receivable, other current assets and accounts payable.

The amounts recorded approximate their realizable values. Cash equivalents comprise highly liquid temporary cash investments expressed in Brazilian reais.

(ii) Investments

These are mainly the investment in Sesamm (as mentioned in note 8), recorded using the equity method, in which the Company has a strategic interest. Considerations of fair value of the shares owned are not applicable.

(iii) Loans and financing

In compliance with Accounting Pronouncements Committee (CPC) pronouncement 14, the fair values of projected cash flows of loans and financing discounted to present values, on December 31, 2008.

Discount to Carrying Projected present amount cash flows value Differences Local currency

Debentures (i) 1,866,139 2,479,587 2,064,856 414,731

BNDES (ii) 202,245 202,245 202,245 -

Other (iii) 2,515,741 2,891,794 2,907,469 (15,675)

4,584,125 5,573,626 5,174,570 399,056

Foreign currency

Financing (iv) 2,280,983 3,108,964 2,984,782 124,182

F-161 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

2,280,983 3,108,964 2,984,782 124,182

6,865,108 8,682,590 8,159,352 523,238

The fair value of the financial instruments was determined in accordance with the following criteria:

(i) (i) Debentures are financings accounted for at their nominal value adjusted through the maturity date, discounted to present value at the future interest market rates, disclosed by Andima (National Association of Financial Market Institutions) in the secondary market, using the base date of December 30, 2008, and the Company’s securities are traded in the domestic market.

(ii) (ii) Financing – BNDES are instruments accounted for at their nominal value adjusted through the maturity date, subject to indexation to TJLP, which is of a particular type not compared to any other market rate. Accordingly, the Company opted to disclose the amount recorded as of December 31, 2008 as the fair value.

(iii) (iii) Other local currency financing are accounted for at their nominal value adjusted through the maturity date, discounted to present value at the future interest market rates. The future rates used were obtained from the website of BM&F (Brazilian Commodities and Futures Exchange).

(iv) (iv) Foreign currency financing are controlled by the original currency, translated at the exchange rate of the balance sheet date, discounted to present value using the future market rate obtained from Bloomberg, based on the Company’s securities traded in the foreign market. In addition, the Company has an instrument denominated in Yen (JBIC, as mentioned in note 12), which used the ratio between the original currency and the US dollar for the conversion to present value.

(b) Market risk

(i) Exchange rate risk

This risk arises from the possibility that the Company may incur in losses due to exchange rate fluctuations, which would increase the liability balances of foreign currency-denominated loans and financing obtained in the market and the related financial expenses. The Company does not have hedge or swap contracts to hedge against this risk; however it is engaged in the active management of the debt, as a way to reduce foreign currency exposure, using the windows of opportunities to replace expensive debts with cheap debts, settling the debts in advance to reduce cost.

A significant portion of the Company’s debt was denominated in US dollar and in Yen totaling R$2,280,983 (note 12). The Company’s net exposure to the exchange rate risk as of December 31, 2008 is summarized as follows:

COMPANY AND CONSOLIDATED In thousands US$ Yen Loans and financing 802,260 15,116,861

(ii) Interest rate risk

F-162 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) into any derivative contract to hedge against this risk; however, it continually monitors market interest rates, in order to evaluate the possible need to replace its debt. As of December 31, 2008, the Company had R$863,950 in loans and financing which were obtained at variable interest rates (CDI and TJLP).

(iii) Credit risk

Credit risk is mitigated by selling to a geographically dispersed customer base.

The table below presents the sensitivity analysis of the financial instruments which may have significant impact on the Company.

Two scenarios are presented, in accordance with CVM Instruction 475/08, to describe the financial assets and liabilities translated at the rate projected to March 31, 2009 with 25% and 50% appreciation in scenario I and 25% and 50% impairment in scenario II, as shown below:

SCENARIO I 2008 Rate higher Rate higher Financial instruments Risk Probable than 25% than 50% Financial asset Cash and cash equivalents

Short-term investments (Nossa Caixa and Bradesco) CDB 561,523 701,904 842,285

Financial liability Loans and financing

Banco do Brasil, CEF and Municipal Gov. of Presidente Prudente UPR 2,315,358 2,894,198 3,473,037

Debentures, FIDC and BI Cia. Secutirizadora CDI 814,550 1,018,187 1,221,825

Debentures IGPM 1,274,764 1,593,453 1,912,144

Debentures IPCA 149,702 187,127 224,553

BNDES and FEHIDRO TJLP 205,547 256,934 308,321

IADB and EUROBONDS US$ 1,841,600 2,302,000 2,762,400

JBIC Yen 343,107 428,884 514,661

Financial liabilities’ benchmarks – projected rate for March 31, Rate increase by Scenario I 2009 * 25% 50% UPR 1.63% 2.04% 2.45% CDI 13.03% 16.29% 19.55% IGPM 4.49% 5.61% 6.74% IPCA 4.10% 5.13% 6.15% TJLP 6.25% 7.81% 9.38% US$ 2.30 2.88 3.45 JPI 0.022697 0.02837 0.034046 SCENARIO II 2008

F-163 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

Financial instruments Risk Probable Rate lower than Rate lower than 25% 50%

Financial asset Cash and cash equivalents

Short-term investments (Nossa Caixa and Bradesco) CDB 561,523 421,142 280,762

Financial liability Loans and financing

Banco do Brasil, CEF and Municipal Gov. of Presidente Prudente UPR 2,315,358 1,736,519 1,157,679

Debentures, FIDC and BI Cia. Secutirizadora CDI 814,550 610,912 407,275

Debentures IGPM 1,274,764 956,072 637,381

Debentures IPCA 149,702 112,276 74,851

BNDES and FEHIDRO TJLP 205,547 154,160 102,774

BID and EUROBONDS US$ 1,841,600 1,381,200 920,800

JBIC Yen 343,107 257,331 171,554

Financial liabilities’ benchmarks – projected rate for March 31, Rate decrease Scenario II 2009 * 25% 50% UPR 1.63% 1.22% 0.82% CDI 13.03% 9.77% 6.52% IGPM 4.49% 3.37% 2.25% IPCA 4.10% 3.08% 2.05% TJLP 6.25% 4.69% 3.125% US$ 2.30 1.73 1.15 JPI 0.022697 0.017023 0.011349

* The projected rates for March 31, 2009 were obtained from the Banco Central do Brasil website, report Focus.

21. OPERATING REVENUE COMPANY 2008 2007

Greater São Paulo Metropolitan Area 5,207,678 4,888,077 Regional systems (i) 1,631,125 1,560,134 Total 6,838,803 6,448,211

(i) Comprises municipalities operated in São Paulo State inland and coastal regions.

22. OPERATING COSTS AND EXPENSES COMPANY 2008 2007 Cost of sales and services: Salaries and related taxes 1,027,527 970,065 General supplies 135,814 121,821 Treatment supplies 133,154 112,339 Outsourced services 443,973 384,114

F-164 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

22. OPERATING COSTS AND EXPENSES COMPANY 2008 2007 Electricity 457,740 472,525 General expenses 36,400 31,316 Depreciation and amortization 597,201 603,516 2,831,809 2,695,696 Selling expenses: Salaries and related taxes 179,197 158,338 General supplies 6,159 5,373 Outsourced services 131,921 88,585 Electricity 751 736 General expenses 60,782 58,554 Depreciation and amortization 3,875 4,627 Allowance for doubtful accounts, net of recoveries 336,264 323,339 718,949 639,552 Administrative expenses: Salaries and related taxes 147,034 137,267 General supplies 4,579 4,621 Outsourced services 112,663 66,300 Electricity 1,098 1,218 General expenses 247,802 291,803 Depreciation and amortization 16,728 7,845 Tax expenses 48,554 43,575 578,458 552,629 Costs, and selling and administrative expenses: Salaries and related taxes 1,353,758 1,265,670 General supplies 146,552 131,815 Treatment supplies 133,154 112,339 Outsourced services 688,557 538,999 Electricity 459,589 474,479 General expenses 344,984 381,673 Depreciation and amortization 617,804 615,988 Tax expenses 48,554 43,575 Allowance for doubtful accounts, net of recoveries (note 6 (c(ii))) 336,264 323,339 4,129,216 3,887,877 Financial expenses: Interest and charges on loans and financing – local currency 423,245 447,046 Interest and charges on loans and financing - foreign currency 71,344 66,329 interest on capital (note 18(e(i))) 296,188 300,744 Interest on capital (reversal) (296,188) (300,744) Other financial expenses 26,212 69,287 Income tax on remittance abroad 5,019 6,346 Inflation adjustment on loans and financing 127,938 101,310 Other inflation adjustments 20,512 8,059 Reserve for financial contingencies 165,130 183,027 839,400 881,404 Financial income: Monetary variation gains 420,374 34,281 Income on short-term investments 62,179 51,469 Interest and other 88,057 46,659 570,610 132,409 Financial income, net 268,790 748,995 Foreign exchange change, net: Foreign exchange change on loans and financing 436,157 (188,411) Other foreign exchange change - 87 Foreign exchange gains 2,712 286

438,869 (188,038)

F-165 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

The consolidated balance includes administrative expenses, in the amount of R$138, and financial income, in the amount of R$129.

23. OTHER OPERATING EXPENSES, NET (Adjusted, see note 2)

The breakdown of “Other operating expenses, net” is as follows: COMPANY 2008 2007

Other operating income 70,280 52,633 COFINS and PASEP (5,306) (6,518) 64,974 46,115 Other operating expenses (1,117,958) (81,291)

Other operating expenses, net (1,052,984) (35,176) Other operating income is comprised of sale of property, plant and equipment, sale of contracts awarded in public bids, and indemnities and reimbursement of expenses, fines and collaterals, property leases, reuse water, Pura and Aqualog project and services.

24. OPERATING INCOME (EXPENSES) BY SEGMENT (Adjusted, see note 2)

The Company reports two identifiable segments: (i) water supply systems; and (ii) sewage collection systems.

COMPANY AND CONSOLIDATED COMPANY

2008 2007 DESCRIPTION WATER SEWAGE TOTAL WATER SEWAGE TOTAL

Gross revenue from sales and services - retail 3,503,643 2,891,036 6,394,679 3,325,826 2,724,400 6,050,226

Gross revenue from sales - bulk 314,952 16,606 331,558 291,705 8,002 299,707

Other income and services rendered 74,547 38,019 112,566 64,359 33,919 98,278 Gross revenue from sales and services 3,893,142 2,945,661 6,838,803 3,681,890 2,766,321 6,448,211

Gross sales deductions (277,310) (209,821) (487,131) (272,575) (204,794) (477,369)

Net revenue from sales and services 3,615,832 2,735,840 6,351,672 3,409,315 2,561,527 5,970,842

Costs, and selling and administrative expenses (2,717,310) (1,411,906) (4,129,216) (2,530,933) (1,356,944) (3,887,877)

income from operations before other operating expenses, net 898,522 1,323,934 2,222,456 878,382 1,204,583 2,082,965

Other operating expenses, net (1,052,984) (35,176)

F-166 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

Income from operations before equity in subsidiary and financial income (expenses) 1,169,472 2,047,789

The consolidated balance of income from operations before equity in subsidiary totals R$1,169,334, and the difference of R$138 is mainly represented by administrative expenses, as Sesamm was in the pre-operating stage as of December 31, 2008.

25. MANAGEMENT FEES

The compensation paid by the Company to the members of its board of directors and officers amounted to R$2,444 and R$2,373 for the years ended December 31, 2008 and 2007, respectively. An additional amount of R$933, related to the bonus program, was accrued in the period from January to December 2008.

26. COMMITMENTS

(i) Rentals

Operating, administrative and property leases already contracted require the following minimum payments, as follows:

2009 6,781 2010 2,150 2011 800 TOTAL 9,731

Lease expenses for the years ended December 31, 2008 and 2007 were R$8,516 and R$8,214, respectively. Lease expenses refer to the following: property rentals, machinery and equipment leases, IT equipment leases, and photocopiers leases.

(ii) Firm demand contracts

The Company has entered into long-term contracts with electric power providers. The main amounts regarding this type of contracts are presented as follows:

2009 196,090 2010 135,916 2011 136,110 2012 114,008 2013 847 2014 382 2015 83 TOTAL 583,436

Electric power expenses for the years ended December 31, 2008 and 2007 were R$459,880 and R$474,762, respectively. The amount of R$459,589 (R$474,479 in 2007) was recorded in expenses and of R$291 (R$283 in 2007) in investments.

27. AGREEMENT WITH THE MUNICIPALITY OF SÃO PAULO

On November 14, 2007, the Company and the Municipality of São Paulo (the Parties) entered into an Agreement to establish the conditions that ensure the stability in the provision of water supply and sewage, and environmental utility services in the city of São Paulo, the main provisions of which are as follows: 1. the Parties made the commitment to take basic sanitation and environmental actions, complementary to the actions of the Municipality of São Paulo, by investing in the deployment and continuity of programs such as: Programa Córrego Limpo (Clean River Program) and Programa de Uso Racional da Água – PURA (Rational Water Use Program), the purpose of which is to ensure a

F-167 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) decrease in water consumption by City government units, ensuring water supply to and the quality of living of the population; 2. starting November 14, 2007, all the amounts paid by the Municipality of São Paulo to SABESP, referring to consumption by City departments, agencies, and foundations, net of taxes, will be used in basic sanitation and environmental actions in the municipality; 3. the Municipality made the commitment to resume the payment of consumption bills issued by SABESP, starting November 14, 2007; 4. the Parties shall complete, within 90 days, the projects required to determine the outstanding amounts and prepare the drafts of the Bill to obtain the approval of the City Council to the Cooperation Agreement and Metropolitan Program Contract, to ensure the stable provision by SABESP of water supply and sewage services in the municipality, through associated management of the assumed utility services, jointly by the Municipality and the State of São Paulo, pursuant to the general basic sanitation service principles laid down in State Law 11445/07 and related State legislation; 5. the Parties and the State shall conclude, within 90 days after the execution of the Agreement, the terms and conditions of the Cooperation Agreement and Metropolitan Program Contract, to ensure the stable provision by SABESP of water supply and sewage services in the municipality; 6. the approval of Municipal Authorization Law is an essential condition both for signing the Cooperation Agreement, to be signed by the Municipality and the State of São Paulo, and the Metropolitan Program Contract, to be signed by the Municipality and SABESP; 7. after the Bill is submitted to the City Council, the Parties will enter into an instrument for settlement of outstanding debts. A discount in the amount of R$120 million on the City’s debts will be granted, under contract. Part of these debts will be paid free of financial charges arising from interest, fines and monetary adjustment, and the rest under Municipal Interdepartmental Administrative Rule 01/2005, in seven annual installments; 8. the Parties shall require the termination of the collection lawsuits filed by SABESP, where SABESP shall pay the court fees, and each Party shall pay the lawyers’ fees, in an estimated amount of R$1.9 million.

On February 11, 2008, the Parties signed the First Amendment to the Agreement with the Municipality of São Paulo. The Parties decided to extend the agreement for a period equal to the original period, so that the Parties may conclude the required understandings to settle the outstanding debts and prepare the drafts of the Cooperation Agreement, the Metropolitan Contract Program, and the Authorization Bill.

The stages already in progress are the conclusion of the drafts of said instruments, sending the Bill to the City Council, concluding the required understandings to settle the outstanding debts, and jointly defining the sanitation and environmental actions to be taken.

On August 29, 2008, the Municipality of São Paulo submitted Bill 558/08 to the São Paulo City Council. The approval of this municipal Law will authorize the Cooperation Agreement and Metropolitan Program Contract between the Executive branch and the São Paulo State, São Paulo State Sanitation and Power Regulatory Agency (ARSESP) and SABESP.

F-168 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP NOTES TO THE FINANCIAL STATEMENTS For the Years Ended December 31, 2008 and 2007 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

Also in December 2008, the Municipal Bill 558/08 was approved in the first vote. Final approval depends on the second vote at the Plenary Session.

28. SUBSEQUENT EVENTS

Corporate restructuring

The restructuring of headcount, initiated on February 2009 by SABESP, is consistent with the Company’s need to conform to its new reality in the market: commitment to universal services of water supply and sewage services by 2018 in the 366 São Paulo municipalities where the Company operates and the possibility of new business since State Laws 12292/2006 and 1025/2007, which allowed SABESP to operate in drainage, solid waste and energy markets.

The Company will conduct a competitive examination to fill 1,771 jobs, mostly for operating areas. The examination is part of the strategy to renew the Company’s staff.

Within this strategy, a Commitment Agreement for Adjustment of Conduct (TAC) was signed on February 20, which includes termination of all retired employees paid by National Institute of Social Security (INSS) from SABESP’s permanent headcount, as required by the State Public Prosecution Office. In order to meet the standards of quality of the services rendered to the population, terminations will be gradually performed, totaling 2,250 retired employees between 2009 and 2011 replaced with professionals who succeeded the exam.

Upon termination of the labor agreement, in addition to the termination pay, the Company will pay the fine of 40% on the Government Severance Indemnity Fund for Employees (FGTS) related to the total period worked.

Furthermore, SABESP will ensure the payment of the Company’s portion of the welfare plan for up to six months after termination.

The estimated disbursement with terminations is R$166,878.

Agreement with the Municipality of São Paulo

On June 18, 2009, the Municipal Government passed Law 14934, enacted during the City Council session of June 3, 2009, which approved Bill 558/08.

The Fourth Amendment to the Agreement was signed on August 6, 2009 and includes the basic environmental sanitation, the channeling of the CEU Uirapuru, Curtume and Tiburtino streams.

EMAE

The entered into an agreement with EMAE – Empresa Metropolitana de Águas e Energia S.A. (“Confidentiality Agreement”) to start a due diligence process at this company, without any binding effect, for a future possible acquisition of assets, which can, but not limited to, result in the corporate restructuring of EMAE or even the acquisition by SABESP of the shares of EMAE, in compliance with relevant legislation and the terms inherent to this type of transaction.

F-169 [PAGE LEFT INTENTIONALLY BLANK] ANNEX A

SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN BRAZILIAN GAAP AND IFRS

Our financial statements included elsewhere in this offering memorandum have been prepared in accordance with Brazilian GAAP. Brazilian GAAP comprises the accounting guidelines provided by the Brazilian Corporate Law, as amended by Law No. 11,638 and Law No. 11,941, dated May 27, 2009; accounting standards issued by IBRACON; accounting standards issued by the CFC; accounting standards issued by the CPC; and the rules and regulations issued by the CVM. The CVM set 2010 as the deadline for adoption of IFRS for the consolidated financial statements of publicly-held companies, such as SABESP. On December 28, 2007, Law No. 11,638/07 was enacted, amending the Brazilian Corporate Law regarding the accounting practices adopted in Brazil. When we present our financial statements under IFRS to comply with this requirement, and as Brazilian GAAP migrates towards IFRS, our financial statements under IFRS may be materially different from those actually presented under Brazilian GAAP. The matters described below summarize certain differences between Brazilian GAAP and IFRS that may be material. The Company is responsible for preparing the summary below. The Company has not prepared a complete reconciliation of its consolidated financial statements and related footnote disclosures between Brazilian GAAP and IFRS and has not quantified such differences. Accordingly, no assurance is provided that the following summary of differences between Brazilian GAAP and IFRS is complete and it should not be construed as exhaustive..

In reading this summary, prospective investors in the notes should also have regard to the following considerations:

 This summary includes differences among Brazilian GAAP and IFRS as of December 31, 2009, considering January 1, 2009 as the opening balance sheet. Differences resulting from changes in accounting standards or from transactions or events that had occurred before December 31, 2009 have not been taken into account in this summary.

 Differences among Brazilian GAAP and IFRS resulting from future changes in accounting standards or from transactions or events that may occur in the future have not been taken into account in this summary, and no attempt has been made to identify any future events, ongoing work and decisions of the regulatory bodies that promulgate Brazilian GAAP and IFRS that could affect future comparisons among Brazilian GAAP and IFRS. The current differences disclosed in this summary are not intended to be complete and are subject to, and qualified in their entirety by reference to, the respective pronouncements of the Brazilian accounting bodies and those of the International Accounting Standards Board and the International Financial Reporting Interpretations Committee.

 Certain differences exist between Brazilian GAAP and IFRS which might be material to the financial information included in this offering memorandum. Therefore, in making an investment decision, investors must rely upon their own examination of the Company, the terms of the offering and the financial information included in this offering memorandum and prospective investors unfamiliar with Brazilian GAAP should consult their own professional advisors for an understanding of the differences among Brazilian GAAP and IFRS and how those differences might impact the financial information presented herein.

 Unlike IFRS, under Brazilian GAAP there are no specific principles relating to certain matters such as business combinations, financial instruments, accounting and reporting for research and development costs.

This summary does not address differences related solely to the classification of amounts in the financial statements or footnote disclosures.

Accounting for the Effects of Inflation

Under Brazilian GAAP, because of the highly inflationary conditions which have prevailed in the past, a form of inflation accounting, referred to as monetary correction, has been in use for many years to minimize the

A-1 impact of the distortions in financial statements caused by inflation. However, as from January 1, 1996, no inflation accounting adjustments are permitted for financial statements prepared under Brazilian GAAP.

Under IFRS, inflation accounting following the methodology prescribed by standard IAS 29 (Financial Reporting in Hyperinflationary Economies) is required for companies which report in local currency and which operate in hyperinflationary economies in which cumulative inflation has exceeded 100% over the preceding three years. However, other indicators prescribed by IAS 29 can be taken in conjunction with the 100% three-year inflation limit. As a result, considering this quantitative limit for IFRS purposes, financial statements should be adjusted for the effects of inflation to the date on which the Brazilian economy was no longer deemed to be hyperinflationary, which was January 1, 1998.

Property, Plant and Equipment

Under Brazilian GAAP, property, plant and equipment are stated at cost, monetarily adjusted through December 31, 1995, less depreciation, and include optional revaluation prior to 2008. Donations of property, plant and equipment received from third parties and government entities to enable the Company to provide water supply and sewage services are recorded in property, plant and equipment as a contra entry to revenue. Borrowing costs of loans and financing for construction in progress are allocated to the costs of the assets. Foreign exchange effects on foreign currency loans and financing are capitalized.

Under IFRS, property, plant and equipment are recognized in accordance with IAS 16 (Property, Plant and Equipment). Property, plant and equipment are stated at historical cost less depreciation. Revaluation is only permitted in limited circumstances. The historical cost was adjusted to reflect the effect of the hyperinflationary economy that had affected Brazil through December 31, 1997. Donations are recorded as revenues. Capitalization of borrowing costs includes capitalizing foreign exchange differences relating to borrowings to the extent that they are regarded as an adjustment to interest costs. The gains and losses that are an adjustment to interest costs include the interest rate differential between borrowing costs that would be incurred if the entity borrowed funds in its functional currency, and borrowing costs actually incurred on foreign currency borrowings.

Service Concession Arrangements

Under Brazilian GAAP, revenue from water supply and sewage collection are recognized as the water is consumed and services are provided. Revenues from unbilled water supply and sewage services are recorded as trade accounts receivable based on monthly estimates, so as to match revenues and expenses in the proper period.

Under IFRS, service concession arrangements are recognized in accordance with IFRIC 12 (Service concession arrangements).

As per IFRIC 12, revenues are recognized at the fair value of the consideration received or receivable for the sale of those services and are shown net of value-added tax, returns, rebates and discounts. Revenues from unbilled water supply and sewage services are recorded as trade accounts receivable based on monthly estimates. Revenue is recognized when: (i) the amount of revenue can be reliably measured; (ii) it is probable that future economic benefits will flow to the Company; and (iii) it is probable that the amounts will be collected. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved.

IFRS 1 allows companies adopting IFRS for the first time to apply the transition rules in IFRIC 12. The transition rules in IFRIC 12 require the standard to be applied fully retrospectively unless impracticable. The Company considers its application to be impractical due to the cost and time required for retrospective application due to the large number of concession arrangements in force and the age of the contracts, since many of them were entered in the 1970’s and 1980’s. For those service concession arrangements for which is impractical to apply the Standard retrospectively, the transition rules in IFRIC 12 require that the Company:

(a) Recognize financial assets and intangible assets that existed at the beginning of the earliest period presented (January 1, 2008);

A-2 (b) Use the previous carrying amount of those financial and intangible assets as their carrying amounts as at that date; and

(c) Test financial and intangible assets recognized at that date for impairment, unless this is not practicable, in which case the amounts shall be tested for impairment.

A financial asset is recognized if the concession terms permit recognition of such asset and the difference is allocated to intangible assets.

The intangible asset represents the right to invoice customers for water supply and sewage services on a systematic basis.

Accounts Receivable from Related Parties

Under Brazilian GAAP, supplemental pension paid on behalf of the State government and claims for their reimbursement are recorded as accounts receivable from that shareholder.

According to IAS 19 (Employee benefits), only when it is virtually certain that another party will reimburse some or all of the expenditure required to settle a defined benefit obligation, an entity shall recognize its right to reimbursement as a separate asset. Since it is not virtually certain that the Company will be able to recover in full those reimbursements, the Company would not recognize part of the receivable under IAS 19, unless there is a formal agreement with the State government for that reimbursement.

The amount of accounts receivable from related party recognized under Brazilian GAAP that would not be recognized under IFRS totalled R$696,283 thousand as of December 31, 2009 and 2008.

Debt Issuance Costs

Under Brazilian GAAP, transaction costs associated with the issuance of debt are capitalized, amortized over the contractual debt term and controlled in the same currency as the debt since 2007. Before this date, the costs were recognized in the income statement.

Under IFRS, as per IAS 39, the amortized cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount, and minus any reduction (directly or through the use of an allowance account) for impairment or uncollectability. When calculating the effective interest rate, an entity shall estimate cash flows considering all contractual terms of the financial instrument. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate (see IAS 18), transaction costs, and all other premiums or discounts.

Employee Pension Costs and Other Post-employment Benefits

Under Brazilian GAAP, employee pension costs and other benefits were expensed as they fall due until the issuance of the IBRACON statement (NPC 26). As from the fiscal years beginning on or after December 31, 2002, with prior application encouraged, NPC 26 approved by the CVM should be applied by sponsors of plans that are public companies to account for employee benefits including pension costs and other post-employment benefits. Under the new standard, an actuarial method is used for determining defined benefit pension costs and other post-employment benefits, and the new standard provides for the deferral of actuarial gains and losses (in excess of a specific corridor). Defined contribution pension plans and other post employment benefits require the recognition as an expense of contributions when they fall due. If the new standard was implemented up to December 31, 2001, the impact on adoption may be recognized against retained earnings; if the standard is implemented after December 31, 2001, such impact should be recognized in net income over five years or over the estimated remaining life if it is shorter. Specific disclosures are required in financial statements for the year ended December 31, 2001, including the funded/unfunded status of the plan.

A-3 Under IFRS, employee pension costs are recognized in accordance with IAS 19 “Employee Benefits.”

The Standard (IAS 19) identifies four categories of employee benefits:

(i) short-term employee benefits, such as wages, salaries and social security contributions, paid annual leave and paid sick leave, profit-sharing and bonuses (if payable within twelve months of the end of the period) and non-monetary benefits (such as medical care, housing, cars and free or subsidized goods or services) for current employees;

When an employee has rendered service to an entity during an accounting period, the entity shall recognize the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service:

(a) as a liability (accrued expense), after deducting any amount already paid. If the amount already paid exceeds the undiscounted amount of the benefits, an entity shall recognize that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund; and

(b) as an expense, unless another Standard requires or permits the inclusion of the benefits in the cost of an asset (see, for example, IAS 2 (Inventories) and IAS 16 (Property, Plant and Equipment)).

(ii) post-employment benefits such as pensions, other retirement benefits, post-employment life insurance and post-employment medical care;

When an employee has rendered service to an entity during a period, the entity shall recognize the contribution payable to a defined contribution plan in exchange for that service:

(a) as a liability (accrued expense), after deducting any contribution already paid. If the contribution already paid exceeds the contribution due for service before the balance sheet date, an entity shall recognize that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund; and

(b) as an expense, unless another Standard requires or permits the inclusion of the contribution in the cost of an asset (see, for example, IAS 2 (Inventories) and IAS 16 (Property, Plant and Equipment)).

(iii) other long-term employee benefits, including long-service leave or sabbatical leave, jubilee or other long-service benefits, long-term disability benefits and, if they are payable twelve months or more after the end of the period, profit-sharing, bonuses and deferred compensation. The amount to be recognized as a liability for other long-term employee benefits shall be the net of the present value of the defined benefit obligation minus the fair value of the plan assets out of which the obligation are to be settled directly.

(iv) termination benefits are recognized as a liability and as an expense when, and only when, the entity demonstrates to be committed to (a) terminate the employment of an employee or group before the normal retirement and (b) provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

For defined benefit plans, IFRS 1 permits all cumulative actuarial gains and losses to be eliminated in the opening balance sheet.

A-4 Income Taxes

Under Brazilian GAAP, the methods adopted for the recording of income taxes are similar to IFRS, but their practical application may lead to different results in certain circumstances. The recognition of tax credits derived from temporary differences and tax losses is an area that requires considerable judgment. In general, tax credits are recognized when there is evidence of future realization in a continuous operation, potential effects of Provisional Measures enacted by the Brazilian government are evaluated and the effects of increases in enacted tax rates on deferred taxes may not be integrally recognized if the related legislation is being questioned.

Under IFRS, the liability method is used to calculate the income tax provision, as specified in IAS 12, (Income Taxes). Under the liability method, deferred tax assets or liabilities are recognized with a corresponding charge or credit to income for differences between the financial and tax basis of assets and liabilities to each year/period end. Deferred taxes are computed based on the enacted tax rate of income taxes. Net operating loss carry forwards arising from tax losses are recognized as assets. The deferred tax asset shall be recognized to the extent that it is probable that future taxable profit will realize such deferred tax asset. Additionally, the other differences between Brazilian GAAP and IFRS would be subject to deferral tax effects.

Comprehensive Income

Brazilian GAAP does not recognize the concept of comprehensive income.

Also, as under Brazilian GAAP, statutory reserves are required to appropriate 5% of the annual local currency earnings, after absorbing accumulated losses, to a legal reserve, which is restricted as to distribution. The reserve may be used to increase capital or absorb losses, but may not be distributed as dividends. Any income remaining after the distribution of dividends on the statutory records and appropriations to statutory reserves is transferred to the reserve for future investments. Such reserve may be distributed in the form of dividends upon approval of the shareholders. There are no similar provisions under IFRS.

Under IFRS, a statement of recognized income and expenses can be presented including net income as well as other items of income and expense recognized directly in equity such as: (i) fair value gains (losses) on lands and buildings, intangible assets, available-for-sale investments and certain financial instruments; (ii) foreign exchange translation differences; (iii) the cumulative effect of a change in accounting policy; (iv) change in fair value on certain financial instruments if designated as cash flow hedges; and (v) actuarial gains and losses on defined benefit plans recognized directly in equity.

Earnings Per Share

Under Brazilian GAAP, disclosure of earnings per share is computed based on the number of shares outstanding at the end of the year.

Under IFRS, in accordance with IAS 33 (Earnings per Share (EPS)), the presentation of earnings per share must be disclosed on the face of the income statement of enterprises with publicly traded ordinary shares (as defined) or potential ordinary shares (as defined), or those in the process of issuing such instruments. The EPS data given is basic EPS and diluted EPS for each class of ordinary share. EPS based on alternative measures of earnings also may be given if required. Computations of basic and diluted earnings per share data should be based on the weighted average number of common shares outstanding during the period and all potentially dilutive common shares outstanding during each period presented, respectively.

Dividends and Interest Attributable to Shareholders’ Equity

Subject to certain limitations, Brazilian GAAP permits companies to distribute or capitalize an amount of interest on shareholders’ equity based on the TJLP. Such amounts are deductible for tax purposes and are presented as a direct reduction of shareholders’ equity. By the end of the year, management is required to propose payment of dividends in those years which realize a profit, unless such profit has been absorbed by any accumulated losses. The entire proposed amount is accounted for as a liability at the balance sheet date.

A-5 Under IFRS, both the minimum dividends required by law and/or included in the entity’s by-laws meet the definition of present obligation and, therefore, should be accounted for at the end of the year.

Segment Information

Under Brazilian GAAP, there is no requirement for financial reporting of operating segments.

IFRS requires public entities to report primary and secondary segments, business and geographic regions, based on risks and returns and internal reporting structure. The information must be prepared according to group accounting policies.

All entities with listed equity or debt securities or that are in the process of obtaining a listing are required to disclose segment information. A two-tier approach to segment reporting is required, and an entity should determine its primary and secondary segment reporting formats (i.e., business or geographical, but not a mixture) based on the dominant source of the entity’s business risks and returns.

Reportable segments are determined by identifying separate profiles of risks and returns and then using a threshold test. The majority of the segment revenue must account for 10% or more of either total revenue, total profit or loss, or total assets. Additional segments must be reported (even if they do not meet the threshold test) until at least 75% of consolidated revenue is included in reportable segments.

The disclosures concentrate mainly on the segments in the primary reporting format, with only limited information being presented on the secondary segment. Disclosures for reportable segments in the primary reporting format include, by segment: revenue, result, assets, liabilities, capital expenditure, depreciation and amortization, the total amount of significant non-cash expenses and impairment losses. Disclosures for reportable segments in the secondary segment include segment revenue, assets and capital expenditure. Segment result is not required to be shown for secondary segments.

A reconciliation should be provided between the information disclosed for reportable segments and the totals shown in the financial statements.

Cash and Cash Equivalents

Under Brazilian GAAP, cash equivalents are defined in broader terms than in the context of IFRS, with no limitation of 90 days/three month original maturity. Cash equivalents in Brazil are usually readily available funds which involve cash and overnight applications and may include long-term securities which can be negotiated in the secondary market.

Under IFRS, cash equivalents are defined as short-term (less than 3 months), highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Generally, only investments with original maturities of three months or less qualify under that definition held for the purposes of meeting short-term cash commitments rather than for investment or other purposes.

A-6 PRINCIPAL EXECUTIVE OFFICES

Companhia de Saneamento Básico do Estado de São PauloSABESP Rua Costa Carvalho, 300 05429‑900 São Paulo, SP Brazil TRUSTEE, REGISTRAR, PRINCIPAL PAYING AGENT AND TRANSFER AGENT Deutsche Bank Trust Company Americas Trust & Securities Services 60 Wall Street, Mailstop NYC60-2710 New York, NY, 10005 USA

LUXEMBOURG PAYING AGENT, TRANSFER AGENT AND LISTING AGENT Deutsche Bank Luxembourg S.A. 2 bd. Konrad Adenauer L-1115 Luxembourg

LEGAL ADVISORS

To the Issuer To the Issuer as to U.S. Law as to Brazilian Law Mayer Brown LLP Felsberg, Pedretti, Mannrich e Aidar Advogados e Consultores Av. Pres. Juscelino Kubitschek, 1455 Legais 5th and 6th Floors Av. Paulista, 1294 04543-011, São Paulo - SP 2nd Floor Brazil 01310-915, São Paulo – SP Brazil

To the Initial Purchasers To the Initial Purchasers as to U.S. Law as to Brazilian Law White & Case LLP Souza, Cescon Barrieu & Flesch Av. Brig. Faria Lima, 2277 - 4th Floor Rua Funchal, 418 – 11th Floor 01452-000, São Paulo – SP 04551-060, São Paulo – SP Brazil Brazil

INDEPENDENT ACCOUNTANTS TO THE ISSUER PricewaterhouseCoopers Auditores Independentes Av. Francisco Matarazzo, 1400 05001-903 São Paulo - SP Brazil

Deloitte Touche Tohmatsu Auditores Independentes Rua Alexandre Dumas, No. 1981 04717-906 São Paulo – SP Brazil