Mario Arruda Sampaio – Investor Relations

Mike Huffman – Rock Point Advisors

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to SABESP conference call to discuss its results for the third quarter of 2014. The audio for this conference is being broadcast simultaneously through the Internet at the website, www.sabesp.com.br. At that same address, you can also find the slide show presentation available for download. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of SABESP’s management and on information currently available to the company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of SABESP and could cause results to differ materially from those expressed in such forward-looking statements. Today with us, we have Mr. Rui Affonso, Chief Financial Officer and Investor Relations Officer; Mr. Mario Arruda Sampaio, Head of Capital Markets and Investor Relations; and Mr. Marcelo Miyagui, Head of Accounting. Now I’ll turn the conference over to Mr. Arruda Sampaio. Sir, you may begin your conference.

Okay, thank you and good morning, everybody for this one more earnings presentation. We have with us 11 slides, where we would like to discuss the main events in the last quarter. After that, as mentioned already by the speaker we’ll go to the question-and-answer session. Let’s start on Slide 3 where we show the company’s billed water and sewage volume, water and sewage volume reported a 3.5% drop in the period as a result of the water consumption reduction incentives program based on its bonus system and already known to many of you. The decline in billed volume of 4.6% in water and 2% in sewage shows the population is stronger here into the bonus program, which is the best main measure to reduce water demand and consumption in the São Paulo Metropolitan Region especially in the Cantareira system where the permitted withdraw in the three reservoirs that makeup the system and the PCJ water basin is today only 18.5 cubic meters per second when it was 31 cubic meters per second before we initiated this water situation. Let’s move to Slide 4. Here, we will comment briefly on our financial results. Net operating revenue including construction revenue grew 1.8% versus the same period of the previous year, the gross operating revenue related to water and sewage services not including construction revenue dropped 9.5% in the same comparison. The main reason for this decrease were 3.5% drop in total billed volume at R$ 22.7 million drop in estimated revenue to the lower billing in the period and the payment of bonus related to the Water Consumption Reduction Incentive Program what we call the bonus program was a R$ 127.2 million impact. The 3.1% tariff adjustment is applied since December 2013 partially has offset this reduction. Costs in administrative, selling and construction expenses increased 19.7% in the period. Adjusted EBITDA reached R$ 742 million in third quarter 2014 versus R$ 1.43 billion in third quarter last year corresponding to a 28.8% decrease. The adjusted EBITDA margin was 26.3% in third quarter this year versus 37.6% in the third quarter last year including construction revenue and construction cost, adjusted EBITDA margin was 35.8%, in this quarter against 46.4% in third quarter 2013. In the first nine months of the year, adjusted EBITDA margin was 28.9% versus 35% in the same – in the previous year. Excluding construction revenue and construction cost in the nine months period year-to-date, adjusted EBITDA margin was 37.4% versus 43.6% last year. In the last 12 months that is LTM, adjusted EBITDA margin was 31.1% if we exclude construction revenue and cost, adjusted EBITDA margin was 40.1% for the last 12 months. Net income came to R$ 91.5 million, an 80.7% down compared to the same period in 2013. Let’s move now to Slide 5, let’s discuss the variations in cost again compared to the same period last year. Costs and expenses moved up by 19.7% over 2013, excluding construction revenue and construction cost. Cost and expenses grew 10% or R$ 140 million, the main increases were R$ 53 million or 40% in general expenses, R$ 46.8 million or 9.6% in payroll and benefits, R$ 37.8 million or 16.7% in depreciation and amortization, R$ 23.2 million or 17.4% in electric power and last R$ 16.1 million or 5.6% in service. All these increases were partly offset by R$ 49.3 million or 178% drop quarter-to-quarter in credit write-offs. For sure, you’ll have much more details on this cost in our earnings press release in case you would like to begin. Next go to slide 6, I’ll comment on the main variations in the items that affected our net income for this quarter over last quarter 2013, which totaled, sorry, over third quarter 2013, which totaled R$ 91.5 million. Net operating revenues grew by R$ 51.1 billion or 1.8%. Cost and expenses, including construction costs, increased by R$ 382.6 million or 19.7%, other operating revenues and expenses recorded a negative variation of R$ 20.8 million, net financial revenues and expenses including foreign exchange variations, increased by R$ 217.9 million in the period. And finally income and social contribution taxes declined by R$ 186.7 million due to the reduction in taxable income in the period. We’ll now next go to slide 7, on this slide, we will update you on the water situation in the São Paulo Metro Region and the measures that SABESP has been adopting to ensure uninterrupted supply to the population directly served by us. It is worth mentioning that this crisis, the worst in history or more specifically in the 84 years of available records, is mainly concentrated in the Cantareira system, which was responsible for supplying water to approximately 8.8 million people. At the beginning and now served 6.5 million people including our wholesale customer. On this slide, we show the reservoir levels of the system that supply the Metro Region of São Paulo. The data reflects the level of the reservoir as of the drive period of the year from June to August, for which this year it lasted until October – when the rainy season usually begins. Specifically, regarding the Cantareira system, the reservoir level on November 13 today – yesterday, sorry, was 10.8% already and this already include the 10.7% related to the second part of the technical reserve and in fact this technical reserve capacity, 105 billion liters of water. The Alto Tietê system jointly with Guarapiranga, Rio Claro, Rio Grande has been used to meet part of the demand of the Cantareira system those R$ 2.3 million difference that we will talk further on the next slide. In fact on the next slide, slide 8, next look at this slide 8, gives you an update of the measures that SABESP has been adopting to deal with the lower water withdrawn from base PCJ water basin, reservoirs making up the Cantareira system, which has been reduced as I mentioned already, since March till to date from 31 cubic meters to 18.5 cubic meters. We’d like to remind you that at the begining of October SABESP announced a proposal to reduce water withdrawn from the Cantareira system from 19.7 cubic meters to 18.5 cubic meters until April, 2015 and we have been withdrawing in fact that difference voluntarily down to 18.5. In order to offset this reduction in withdraw from the Cantareira system, in addition to the measures mentioned above in November the company will increase by 1 cubic meter per second the treatment capacity of Guarapiranga system, which will go from 14 cubic meters to 15 cubic meters per second. This increase in treatment capacity is sufficient to supply a city with 300,000 inhabitants and at the same time reduces demand pressure on the Cantereira system, so that it will begin 2015 with a substantial lower water withdraw demand, what we are enabling to recover in a shorter period. Now let’s remind ourself of the four main initiatives that we have – that we have in hold to reduce water withdrawn from the reservoir -- in the Cantereira reservoir by more than 12 cubic meters per second, maintaining, at the same time, continued water availability to the population directly served by us in the São Paulo Metro Region. Third, consumption reduction, driven by the bonus program, responsible for about 20%, 21% of the savings. Second, the water transfers between the São Paulo Metro Region production system, currently accounting for 41% of this reduction. Third, operational maneuver and investments to reduce water losses, Cantareira accounting for about 34% of the reduction. And finally, reduction in water transfers to wholesale customers that is the water to Guarulhos and São Caetano do Sul accounting for 4% of the reduction. More specifically, regarding the transfer of water from other systems to the areas usually covered by the Cantareira system, thanks to past and current investments made in the interconnection of all of the São Paulo Metro Region’s water supply systems throughout the last year and in its recent intensification, it has been possible to transfer water, so that would and again more than 2.3 million people that used to be supplied by the Cantereira system are now being supplied by the other water systems in the Metro Region. To be more precise of the 8.8 million customers normally served by the Cantereira system, today 6.5 million are being served by this system, 1 million are being served by the Alto Tietê system, the population coverage increased from 3.5 million to 4.5 million. 1 million is being served by the Guarapiranga system, whose population coverage grew from 3.9 million to 4.9 million and the remaining 300,000 are being served by the Rio Claro and the Rio Grande systems. The expected population supply by the Cantereria system will reach 6 million by the end of the year, after the conclusion many of the plans currently ongoing work. Combined efforts of SABESP and the population so far for coninued water supply are equivalent to a water rotation or rationing cycle of 48 hours with water and 120 hours without water, that is the magnitude of what we’re doing without interruption of water. On the next three slides, we will analyze rain, water inflow in the Cantareira and the Alto Tietê system reservoirs, sorry, the Cantereira reservoir and temperatures in the São Paulo Metro Region. On slide 9 and 10 we will comment on rain fall and water inflow levels in the Cantareira system, as you can see between July and October, rainfall was below average with the period and in October this figure was significantly lower than average. November, we are still below average but we still have 16 days ahead of us. As a result of the lower rainfall in the period, water inflows in the Cantereira system reservoir, as shown on the next slide, slide 10, remained below the monthly minimum historical water inflows recorded in the past 84 years. The next slide 11, we show the temperature in the São Paulo Metro Region, you can see that from July to October, temperatures were noticibly higher than at the same period in 2013. More specifically, in October, the highest temperature in 81 years was recorded and that was 37.8 Fahrenheit. Slide 12, we will present -- represents a graphic presentation of the available water volume in the Cantereira system. As you can see, the system’s total reservoir volume is 1.1 billion, 1.493 trillion liters, 982 billion liters of which are -- we call the useful volume which is extracted by gravity and 510 billion liters that’s what we call the technical reserve which is extracted by pumping. SABESP has already accomplished its work and is able to extract the second part of the technical reserve, but considering that we are at the beginning of the rainy season, we expect we will not mean to use the total available water from the second part of the technical reserve. Now let’s move on to slide 13, here we will discuss the bonus program in further detail, which is the measure that most impact the company’s revenue given that it encourages clients to reduce consumption. An assessment of this program in the São Paulo Metro Region in October shows that 50% of the connections saved more than 20%, and therefore reached the 30% bonus, 25% reduced consumption, but does not reach the bonus, and 25% of the connections consumed more than average compared to the consumption bonus average price. These results show the population’s strong adherence to the program even considering a very hot and dry October. So let’s point out that as of November 1, we are – there are two new ranges for bonus program, with basically customers with consumption reduction falls between 10% and 15% will receive a 10% discount and those who reduce their consumption between 15% and 20% will receive a 20% discount. The calculation is made in relation to the average consumptions between February 2013 and January 2014. The 30% discount for users who reduce their consumption by 20% or more is still valid. This change in the bonus program was necessary, it was adjusted to reward the efforts of those who are saving water and restore continuously during the hottest month of the year, but it is normal in fact an increase in consumption. Please note that customers will reduce their bills with the bonus those who achieve it possibly starting in December 2014. Now before we finalize -- that was our last slide, but before we finalize, we would like to comment on two matters. First is about assessments recently announced by the Sao Paulo’s state government, we increased the water supply creating for the entire space from today to 2017 and then this plan has included four projects that are under SABESP responsibility. One of these projects has already mentioned by us in previous call. It is the interconnection between the Piracicaba, Capivari and Jaguari, what we called PCJ has been budgeted at now R$ 330 million and is expected to be completed by 2016. There is another project we have also mentioned before. It is the interconnection of the Rio Grande system with a branch of norm maybe of the Pinheiros River which should increase the bulk water availability and water treatment capacity both as 2.2 cubic meters per second and this has an estimated investment of R$500 million. The two other projects that we will be in charge are reused – our two reused water stations where this reused water from the three reservoirs, the water reservoir will go to the treatment facility – the water treatment facility and that means that the reused water will be diluted into existing untreated bulk water in the reservoir and then collected and treated for human consumption. In these cases, investments are estimated at R$ 525 million. Note that these investments will not be added to the company’s investment plan, but we’ll replace currently planned investments that are to-date considered to be less of a priority and in such will be responded for our later execution. The other investments announced by the government are not under SABESP construction, there is two reservoirs in the PCJ Basin, but the downstream of the reservoirs that are part of the Cantareira system. These new reservoirs should create an additional 57 billion liters of water with reservoir to be utilized for the Campinas city and surrounding cities. Finally and the second matter we would like to share with you is that yesterday we disclosed the material fact in which best Board of Directors authorized the company to request that for that asset published the recalculation of the tariffs to be applied in December 2014, [indiscernible] through the above mentioned resolution disclosed among other matter, the tariff repositioning index for the company’s third tier precision cycle and authorized us, the company to apply it at the most suitable time in the future due to the water shortage and the measures we have adopted through current water savings in order to ensure supply. The Board of Directors resolved at the same time and date -- the Board of Directors has opted to solve the application of the repositioning index until the end of December 2014 at least. Also in the same occasion the Board of Directors aiming to preserve the company’s economic and financial situation for the current year. Well, that concludes our initial remarks and now I would like to -- myself and my colleagues to open for question and answers.

[Operator Instructions] And we have a question from Hasan [indiscernible] of Morgan Stanley. Please go ahead.

Hi Mario. I just want – does it fair to think that 5.4% or is it in addition to the inflation that we increased between April 2014 until the end of December, this year.

Okay Hasan.

Thank you.

We are expecting and the estimate will be made by ARSESP is that they bring the 5.44 value to today’s current value – now exactly how it’s going to happen, we don’t know, we expect to bring it to current back.

Yeah I appreciate it, thank you.

[Operator Instructions] And we have a question from Mike Huffman of Rock Point Advisors. Please go ahead. Mike Huffman - Rock Point Advisors: Hi, thank you for taking the call. The bonus program, is it applied to commercial customers as well as residential?

Yeah. Yes it does, Mike, from what we are speaking, yes it does, it applies to all the customers, the entire customer base. Mike Huffman - Rock Point Advisors: Okay and so your statistics on the take up of the bonus program apply across the board.

Yeah the statistics are based on units of measurement, we either everything we fail for the statistics that is based on the number that are out there, independent of anything. Mike Huffman - Rock Point Advisors: Great and I apologize for not knowing all the details here. The next possible tier adjustment would be next April in 2015 for the next review.

This is what has been established by ARSESP, the regulatory agent. Mike Huffman - Rock Point Advisors: Right, okay. Thank you very much. I’ll drop out.

Okay, no problem.

[Operator Instructions] Now I’ll turn the conference back to SABESP’s management for the final remarks.

Okay, thank you everybody for listening to the presentation and we are totally available to take questions. So if Mike has another question, feel free to call myself, Mario or call our Investor Relations manager, Angela and in fact that is well for everybody. Thanks again and see you next quarter. Bye, bye.

The conference has ended. You may now disconnect your line.