Rui Affonso - Chief Financial Officer and Investor Relations Officer Mario Arruda Sampaio - Head of Capital Markets and Investor Relations Marcelo Miyagui - Head of Accounting

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to SABESP’s conference call to discuss its results for the first quarter of 2015. The audio for this conference is being broadcast simultaneously through the Internet on the website www.sabesp.com.br. In 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 call over to Mr. Arruda Sampaio. Sir, you may begin your conference.

Thank you. Good morning, in fact, good afternoon everybody. Thank you all for attending one more earnings conference call. We have a 9-slide presentation and after that, as already mentioned, we will open for a Q&A session. Let’s start on slide 3. Here, we show the company’s billed water and sewage volume, which fell 11.7% between first quarter 2014 and first quarter 2015, due mostly to the decline in water availability and the measures adopted since 2014 to continue supplying water on an ongoing basis to the population, served mostly in the Metro region of Sao Paulo. It is worth noting that the substantial decline in billed volume in the first quarter of 2015 was also due to the high level of billed volume in the first quarter of 2014, which at that time was atypical due to the high temperatures and dry weather recorded in that period. We would also like to remind you that the measures to encourage consumption reduction began in February 2014 restricted to the Cantareira region which means they had a very limited impact. Moving to slide 4, let’s discuss the financial results. Net operating revenue fell 11.6% compared to first quarter, due to the granting of bonuses and the 11.7% reduction in total billed volume as we mentioned in the previous slide. The decrease was mitigated by the application of the tariff reposition index of 6.5% since December 2014 and the effect of the contingency tariff. Costs in selling, administrative and construction expenses fell 32.9% in the period. It’s worth noting that this decline in cost of expenses was influenced by the reimbursement of the agreement signed in March this year with the Sao Paulo state government totaling R$696 million as mentioned in detail during our first quarter call. Adjusted EBITDA increased 33.6% from R$1 billion in the first quarter 2014 to R$1.4 billion this quarter, while the adjusted EBITDA margin came to 55% against 36.4% in the first quarter last year. If we exclude construction revenues and cost, the adjusted EBITDA margin stood at 71.6% against 44.5% in the first quarter 2014. Net income totaled R$318 million. That is 33.4% less than the first quarter last year. Let’s go to slide 5, discuss the main variation in costs in relation to first quarter 2014. Costs and expenses fell 32.9% compared to the first quarter of 2014. Excluding construction costs, costs and expenses declined 47.9% mainly due to the reimbursement received from the state of Sao Paulo government totaling, as mentioned, R$696 million. If we exclude the effect of this reimbursement, costs and expenses increased by 1.3%, again mainly due to the increase of 221% in credit write-offs, 13.6% in electricity cost and 7.6% in payroll and related charges. It’s also worth highlighting 64.4% decline in general expenses. Again, for further details and discussions on each of the cost variations, invite you to go to our press release, earnings release. Let’s go to slide 6 and quickly go through the items that affected net income between 2014 and 2015, which totaled R$318 million. Net operating revenue fell R$323 million or 11.6%. Cost and expenses, including construction costs, declined R$670 million or 32.9%. Other operating revenues and expenses recorded a positive variation of R$76.7 million. Net financial expenses, monetary restatement and foreign exchange variation increased R$1.013 billion in the period. And finally, there was a reverse effect in income and social contribution taxes due to a tax loss of R$548 million recorded in the period, which resulted in the recognition of deferred income in social contribution factor of R$186 million. Let’s move to slide 7 and on this slide 7 and on the next, 8, we will analyze rainfall, water inflow into the Cantareira system reservoir. On slide 7, 2015 presented a regular rainfall. In January, rainfall was much below average. In February and March, in fact, rainfall came back and was above average. And in April, rainfall was once again below average. Nevertheless, reservoir levels in the Cantareira system improved, mostly due to the fact that we have been continuously removing an increasingly lower volume of water to supply the Metro region that previously relied on this system. So we’re putting less pressure on the Cantareira reservoir. Now on slide 8, we can see that the water inflow into the Cantareira system reservoir came to 18.1 cubic meters per second in April, after two months of inflow above previous recorded minimum and not too distant from half of average monthly figures. We like to highlight that – remind you that the lowest level recorded in 84 years was registered in April, for April in fact, was registered in April 2014 when the average water inflow came to 17.2 cubic meters per second. On slide 9, let’s move there, we’ll give you an update on the main measures SABESP has been adopting since February 2014 to serve the population, despite a reduction in water extraction from the reservoirs in the Cantareira system. First, we highlight that water production in the Cantareira system fell from 31.77 cubic meters in February 2014 when we started the measures, introduced in fact the measures to reduce consumption and down to 13.48 cubic meters per second now in April 2015, which represents a 57.6% decrease during this period. In order to offset this decline in water extraction from the Cantareira system, the company adopted four main initiatives that has been allowing us to reduce extraction by the amount mentioned. As all this is done while maintaining water supply to the entire population directly by us in the Metro region of Sao Paulo. First of the measures is the reduction in consumption encouraged by the bonus program, which has been responsible for 19% of the saving. Second, we have the water transfer between the Sao Paulo Metro region production system, mostly from the Tiete and Guarapiranga into the Cantareira system currently responsible for 36% of this reduction. Third, the operational maneuvers and investments in reducing losses, which is now accounting for 42% of the reduction. And finally, reduction in water transfers to the municipalities of Guarulhos and Sao Caetano do Sul which we provide water on a bulk basis, again this was responsible for 3%. Let’s move on to slide 10, here we present in detail the investments in execution and under development for the period between 2015 and 2017, which are absolutely vital to cope with the water crisis. The main objective of the investments being executed mostly in 2015 and 2016 is to increase the ability to transfer water from other systems, especially the Guarapiranga system and the Alto Tiete system to the areas originally covered by the Cantareira system. In other words, reduce Sao Paulo Metro region’s dependence on the Cantareira system. For 2015, there will be an expansion of 6.5 cubic meters per second, led by the biggest one by the interconnection between the Rio Grande and the Alto Tiete system, whose work began in May. This investment when completed in September will transfer 4 cubic meters per second from the former to the latter. As a result, the region currently supplied, the regions actually, currently supplied by the Cantareira system will be able to be served in greater portion by the Alto Tiete system. In fact, the Alto Tiete system has a treatment capacity of 15 cubic meters per second. Today, we’re producing only 11 cubic meters per second since its reservoir are currently at a low level, in other words, we want to maintain water in the Cantareira, in the Alto Tiete system. As a result, the water that will be transferred from the Rio Grande system will allow us to utilize Alto Tiete’s full water production capacity and such increase its coverage on the areas currently served by the Cantareira system. For 2016, water availability and security will increase by 8.6 cubic meters per second, which will further help recover the reservoir volumes in both the Alto Tiete and the Cantareira system [indiscernible] as a result of the already discussed and announced interconnection between the Jaguari and the Atibainha reservoir. All in all, in the period between 2015 and 2017, water availability and security will increase up to 21 cubic meters per second and production will move up by 7.4. Just as a comparison, when we started the crisis, the water availability was around 74, 75 cubic meters per second and production around 71 cubic meters per second, this we saw in the Metro region of Sao Paulo. Let’s go to slide 11, let’s talk about the bonus program and the contingency tariff. This quarter, in fact, was the first quarter in which both had an impact on our revenue and mostly the contingency tariff. In April, 82% of the consumers reduced consumption and 72% actually received the bonus. This figure was flat in relation to March and was the highest since February 2014 when the program was introduced. These added savings of 6.2 cubic meters per second is sufficient to supply approximately 1.9 million people. Regarding the contingency tariff, it became effective on the bills issued as of February. Of the total 18% that consumed above average, 11% was subject to the contingency tariff and paid higher tariff. The balance 7% also increased consumption but were not charged because they spent less than 10 cubic meters per second, the minimum volume. As we already mentioned at the beginning of this conference call, the impact of the bonus on the company's revenue came to R$211.2 million, while that of the contingency tariff totaled R$79.3 million. The monthly first quarter contingency tariff and bonus information is available in our website, IR website. As of now, this information will be available on a monthly basis. For further details on this communication and disclosure procedure for the monthly numbers, we will provide that later on this week or the beginning of next week. Let's move to slide 12, our last slide, we will here discuss the inflationary adjustment and the extraordinary tariff revision that was disclosed on May 4 by ARSESP and again as already to a great extent informed to the market. Before, let's go back to March then we [indiscernible] compensation for the decline in volume as a result of the water crisis and also the unexpected increase in electricity tariff. ARSESP proposed a total adjustment in revision percentage of 13.87%, that was the initial proposal, and in the public hearing held on April 15 we requested a total adjustment of 22.7%. This is a figure the company considers necessary to ensure its economic and financial balance. On May 4, SABESP published two resolutions, Resolution 560 and Resolution 561. The first Resolution 560 authorizing adjustment of 7.785% on the tariffs constituted by a 2015 annual ordinary tariff adjustment of 7.1899%, calculated based on the 8.1285% IPCA which is a consumer price index variation between March 2014 and March 2015, less the efficiency factor or X factor of 0.9386% and the additional adjustment of 0.5575% due to the postponement of the application of the ordinary tariff revision authorized for May but only applied by us in December, and in fact when it was partially offset. The other resolution number 561 established index was 6.9154% for our request for an extraordinary tariff revision. The sum of the two tariffs adjustment came in at 15.24% below the 22.7% requested by us. The new tariff amounts are applicable 30 days as of their publication in the state's official gazette. Well, this concludes our remarks. I would like to open for the question and answer session.

[Operator Instructions] We have a question from [indiscernible].

Wanted to get a little bit your perspective on the cost structure of the company. Does the current amount of cost, excluding the R$700 million payment or provision reversal, is that a number that we should consider sustainable for the rest of the year or are there elements of the cost performance in the most recent quarter that would make it not indicative of how you think the cost performance should look like over the balance of 2015?

Okay, Doug, just a second. This is Mario. Let me tell you something. First, especially the R$700 million is a non-recurring event, so you should obviously not expect it on next month and so forth. We can say that our opex is fairly stable. We are obviously working on it in terms of trying to keep it fairly even more stable in terms of providing contributions to our margin. What we are, although you didn’t ask is, working and will work hard on our capex, already given that we did not get the 22.7% increase we asked the regulator.

That was going to be my second question. The question really was what recourse do you have at this point given ARSESP’s decision relating to the tariff adjustment given the company’s proposal to not agree with how ARSESP ultimately decided with respect to the extraordinary tariff revision?

From a formal standpoint, we don’t have a recourse, so that is the final number until we are into it. The ordinary tariff revision next is April 2017, obviously if there is anything further extraordinary we may revisit which is allowed the rules and regulations. So what we are saying is again is that we proposed an extraordinary tariff increase that in our view would balance from a financial and economic standpoint of the company, although we would still be fairly well pressed which did not happen. So we will have to compensate for that and we have no numbers set yet, we’re in discussion and we will further decrease the investment we’re planning for this year. So if you recall, last year, on an accounting basis, we did R$3.2 billion, on a cash flow basis about R$2.8 billion. We’re proposing this year R$2.36 billion and we should be – you should expect us to go down further on that. We do not have the number, we don’t know exactly where, the tariff announcement just came in, so we’re working on it, but obviously we’re going to balance out the company to go through this period without getting the full adjustment.

[Operator Instructions] Our next question comes from [Colleen Kelley] of Zen Investment Management.

My question is on the debt and the covenant specifically. It looks like at the end of the first quarter you were pretty close on the growth at EBITDA covenant which I think affects a pretty broad slot of your debt. And so understanding that the tariff increases going through, but I think not until June, it looks like you could remain very close to potentially even trip back covenant, the 3.65 times at the end of the second quarter. So wanted to understand how you’re thinking about that, are you in discussions with your lenders, what happens if you trip the covenant?

We will not comment on how we see ourselves further in the year for obvious reasons. We don't give guidance. As far as having and undertaking discussions with our lenders pertaining specifically this covenant, the answer is no. What we can say is that the company has alternatives to tell with the present financial situation we are, you have to consider that although it was not at the number we requested in terms of extraordinary tariff increase, we are going to start seeing the effects of the 15%, that is one point. As I mentioned in the last question, Doug's question, we will work to balance out the cash flow through capex that indirectly can have effect on total debt. So I think [indiscernible] short-term situation, saying short-term because we understand although this crisis is going further in time than expected, we should come back to a normal situation if there is something. We obviously have an eye open on the macroeconomic variables, they are being helpful today in this period, are very stringent to us, in fact exchange rate peak exactly in March 31, which obviously hit us on that. So this is what I can comment about that. The second question you made was specifically what can happen to – if we breach any covenant, is that it, Colleen?

Yes.

The way to answer that it will take us a long time, we have several contracts and several covenants and what I can say is those that are market related except for one which in fact is a bilateral loan with IDB, it’s an AB loan, except for that one which we – it is an incurring situation, which in fact, if we incur in one quarter, then we would have to waiver it or whatever or incur or whatever only once. So that's one. All the other local debentures and Eurobonds, in fact Eurobond is a maintenance covenant, if we incur it, it's not a covenant. In fact, the covenant is – there is a financial ratio, we have to – the 3.65, we have to maintain below that. If we surpass that, we then get into a limited debt situation. So there is a basket there. So on the local debentures, that one we would need to incur two times in 12 months to then have to renegotiate. So in summary, those are the more visible ones. But again, as I mentioned previously, we do have measures to take even if the situation from a cash flow perspective continues in such for us to go through this period without incurring into any financial indicator breach.

Just to clarify, if you violate the covenant at the end of the second quarter, there are no consequences if there is no further covenant violations in the next couple of quarters. Is that right?

If we violate the financial multiple two times in a row or two times in 12 months, then we are violating the covenant. So let's make sure that the differences between violating a financial ratio and violating a covenant. Okay, so that's important.

And there was no violation of the financial ratio, the 3.65 times at the first quarter?

No, we did not violate it. We were at 3.59, okay.

[Operator Instructions] At this time, there appears that we have no further questions. I’ll turn the conference back over to SABESP’s management team for the final remarks.

Okay, once more thank you for your participation and we will be back in August with our second quarter results. And again, myself and Angela available 24X7 for any doubts you may have and information you may need. So thank you and good bye.

Thank you, sir, and the rest of the management team for your time today. The conference call has now concluded. At this time, you may disconnect your lines. Thank you and have a great day everyone.