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Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under
the Securities Exchange Act of 1934.

Yes ______ No ___X___

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ITR – Quarterly Information Form – 09/30/2016 - CIA SANEAMENTO BÁSICO ESTADO SÃO PAULO	Version: 1

 

In 3Q16, net operating revenue, including construction revenue, reached R$ 3.7 billion; a 17.2% increase compared to the same period of 2015.

Costs and expenses, including construction costs, totaled R$ 2.7 billion, 4.9% higher than 3Q15.

Adjusted EBIT, in the amount of R$ 1,057.3 million, grew 67.3% from R$ 631.9 million recorded in 3Q15.

Adjusted EBITDA, in the amount of R$ 1,337.5 million, increased 48.1% from R$ 903.2 million recorded in 3Q15 (R$ 4,319.6 million in the last 12 months).

The adjusted EBITDA margin was 28.3% in 3Q15 and 35.7% in 3Q16 (32.2% in the last 12 months).

Excluding construction revenues and construction costs, the adjusted EBITDA margin was 49.6% in 3Q16 (40.4% in 3Q15 and 42.5% in the last 12 months).

In 3Q16 the Company recorded a net income of R$ 573.9 million, in comparison to a loss of R$ 580.1 million in 3Q15.

2. Gross operating revenue

Gross operating revenue from water and sewage, not including construction revenue, totaled R$ 2.9 billion, an increase of R$ 526.9 million or 22.6%, when compared to the R$ 2.3 billion recorded in 3Q15.

The main factors that led to this variation were:

· Tariff increase of 8.4% since May 2016;

· Increase of 4.7% in the Company’s total billed volume (4.5% in water and 4.9% in sewage); and

· In 3Q15 there was the bonus granted within the Water Consumption Reduction Incentive Program, concluded in April 2016, in the amount of R$ 248.8 million.

The increase resulting from the above factors was partially offset by the suspension in April 2016 of the Contingency Tariff, in the amount of R$ 144.8 million in 3Q15.

 

 

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Comments on the Company’s Performance

3. Construction revenue

Construction revenue increased R$ 82.6 million or 8.1%, when compared to the same period of the previous year. The variation was mainly due to higher investments in the municipalities served by the Company.

4. Billed volume

The following tables show the water and sewage billed volume, quarter-on-quarter and 9-month basis, per customer category and region.

 

ITR – Quarterly Information Form – 09/30/2016 - CIA SANEAMENTO BÁSICO ESTADO SÃO PAULO	Version: 1

Comments on the Company’s Performance

5. Costs, administrative, selling and construction expenses

In 3Q16, costs, administrative, selling and construction expenses, grew 4.9% (R$ 125.2 million). Excluding construction costs, total costs and expenses increased by 2.8% (R$ 44.7 million).

As a percentage of net revenue, costs and expenses were 80.2% in 3Q15 and 71.8% in 3Q16.

 

5.1. Salaries and payroll charges and Pension plan obligations

There was a decrease of R$ 259.7 million in 3Q16, mainly due to:

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

The above decrease was partly compensated by the following factors:

· Increase of R$ 24.1 million due to the application of a 10.03% salary adjustment in May 2016;

· Increase of R$ 13.7 million in provision for severance pay (TAC); and

· R$ 8.8 million rise in provisions for supplementary payments for retirement plans and pensions under the G0 Plan, due to changes in actuarial assumptions

5.2. Services

Services expenses, in the amount of R$ 347.1 million, grew R$ 50.5 million or 17.0%, in comparison to R$ 296.6 million in 3Q15. The main items that led to this increase were:

· Advertising campaigns amounting to R$ 14 million;

· Maintenance of networks and sewage connections, amounting to R$ 11.7 million;

· Cost of leasing power generator machines for transferring water from the Rio Grande to the Taiaçupeba reservoir, at a cost of R$ 6.7 million;

· Reading water meters and delivering bills, R$ 4.5 million; and

· Surveillance contract, R$ 3.4 million.

5.3. Electricity

Electricity expenses totaled R$ 224.7 million in 3Q16, an increase of R$ 4.7 million or 2.1% in comparison to the R$ 220.0 million in 3Q15. The main factors that contributed to this increase were:

· Average increase of 12.0% in the free market tariffs, with an 8.5% increase in consumption;

 

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Comments on the Company’s Performance

· Average increase of 2.7% in the grid market tariff (TUSD), with a 7.4% decrease in consumption; and

· Average decrease of 8.6% in the regulated market tariffs, with consumption remaining stable.

In 3Q16, the regulated market accounted for 37.1% of the total electricity consumed by the Company, the free market accounted for 33.7% and the grid market accounted for 29.2% of total consumption.

5.4. General expenses

General expenses increased R$ 104.8 million, totaling R$ 249.3 million in 3Q16, versus the R$ 144.5 million recorded in 3Q15, mainly due to:

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

· R$ 21.1 million increase in provisioning for court proceedings;

· Higher provision for the Municipal Fund for Environmental Sanitation and Infrastructure, in the amount of R$ 21.8 million, as a result of the increase in revenues with the municipality of São Paulo; and

· Reversal of provision in 3Q15, totaling R$ 17.9 million, due to the recovery of amounts from the São Paulo State Government (GESP), due to employees assignment.

5.5. Tax expenses

Increase of R$ 3.0 million, largely due to the increase in the Municipal Property Tax (IPTU) in 2016, related to the properties in São Paulo.

5.6. Depreciation and amortization

R$ 8.9 million increase or 3.3%, reaching R$ 280.2 million in 3Q16 in comparison to the R$ 271.3 million recorded in 3Q15, largely due to the beginning of operations of intangible assets, in the amount of R$ 2.2 billion.

5.7. Allowance for doubtful accounts

R$ 127.8 million increase, due mainly to:

• Increase in the write-offs, net of recoveries, amounting to R$ 39.5 million;

• Increase in delinquency, generating an increase of 49.5 million; and

• Reversal of R$ 70.5 million in the provision for losses with municipalities in 3Q15.

This increase was partially offset by the increased receipt of court-ordered debt payments, especially from the city of Guarulhos, amounting to R$ 31.6 million.

6. Other operating revenues (expenses), net

Other net operational revenues and expenses reported a negative variation of R$ 48.0 million, mainly due to the following non-recurring events in 3Q15:

· Receipt of R$ 22.1 million from REAGUA - Programa Estadual de Apoio à Recuperação de Águas (State Program to Support Water Recovery);

· Sale of properties for R$ 16.6 million; and

· Sale of surplus electricity for R$ 4 million.

7. Financial result

 

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7.2.1 Monetary and exchange rate variation on liabilities

The effect of monetary and exchange rate variation on liabilities 3Q16 was R$ 1,380.7 million less than in 3Q15, in particular:

· A positive variation of R$ 1,369.7 million in the cost of currency variations on loans and financing, due to the lower appreciation of the dollar and the yen against the Real in 3Q16 (1.1% and 2.7%, respectively), compared with their appreciation in 3Q15 (28.1% and 30.5%, respectively); and

· Decrease in the cost of other monetary variations by R$ 9.5 million, principally due to lower provisioning for court proceedings in 3Q16.

7.2.2 Monetary and exchange rate variation on assets

A decrease of R$ 32 million, mainly due to the non-recurring monetary adjustment of the agreement with the municipality of Santos in 3Q15.

8. Income tax and social contribution

Grew R$ 586.0 million, due to the increase in taxable income in 3Q16, when compared to 3Q15.

9. Indicators

 

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Comments on the Company’s Performance

9.1. Operating

The volume of water produced remained with an upward trend in the quarter and had an increase of 9.1%. In the year, the increase was of 9.4%.

Concerning the water losses, it's possible to observe that the loss regarding the micro-measurement (IPM) increased from 28.3% in 3Q15 to 31.4% in 3Q16. The figure of the 3Q15 was influenced not only by loss control initiatives, but also by the demand management, resulting from the water crisis and the consequent need to reduce the pressure on the network. It is worth remembering that this measurement considers the average of the last 12 months.

 

10. Loans and financing

In October 2016, the Company raised a foreign loan of US$ 150 million, for a term of 3 years, with interest at a margin of 4.5% p.a. over the 3-month LIBOR rate. Interest on the loan will be payable quarterly, and capital repayments will be six-monthly after an 18-month grace period. The proceeds of the loan were used to settle the Eurobond 2016 issue, for a total of US$ 140 million, and other debts maturing in 2016.

 

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11. Capex

In the third quarter of 2016, the Company invested R$ 1.1 billion, totaling R$ 2.7 billion in the first nine months of 2016.

 

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Notes to the Interim Financial Information

1 Operations

Companhia de Saneamento Básico do Estado de São Paulo ("SABESP" or the "Company") is a mixed-capital company headquartered in São Paulo, at Rua Costa Carvalho, 300, CEP 05429-900, controlled by the São Paulo State Government. The Company is engaged in the provision of basic and environmental sanitation services in the State of São Paulo, as well as it supplies treated water and sewage services on a wholesale basis.

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, in a sustainable and competitive manner, with excellence in customer service.

As of September 30, 2016, the Company operated water and sewage services in 366 municipalities of the State of São Paulo. Most of these municipalities operations are based on 30-year concession, program and services contracts. The Company has two partial contracts with the municipality of Mogi das Cruzes, however, since most of municipality is serviced by wholesale, it was not included in the 366 municipalities. As of September 30, 2016, the Company had 368 contracts.

SABESP is not temporarily operating in some municipalities due to judicial orders. The lawsuits in progress refer to Macatuba and Cajobi, and the carrying amount of these municipalities’ intangible assets was R$4,345 as of September 30, 2016 and December 31, 2015.

As of September 30, 2016, 55 concession agreements had expired and are being negotiated. From September 30, 2016 to 2030, 34 concession agreements will expire. Management believes that concession agreements expired and not yet renewed will result in new contracts, disregarding the risk of discontinuity in the provision of municipal water supply and sewage services. By September 30, 2016, 279 program and services contracts were signed (278 contracts as of December 31, 2015).

As of September 30, 2016, the carrying amount of the underlying assets used in the 55 concessions of the municipalities under negotiation totaled R$6,489,333, accounting for 21.37% of the total, and the related gross revenue for the nine-month period then ended totaled R$1,322,077, accounting for 12.28% of the total.

The Company’s operations are concentrated in the municipality of São Paulo, which represents 55.35% of the gross revenues as of September 30, 2016 (51.52% as of September 30, 2015) and 45.84% of intangible assets (43.37% as of December 31, 2015).

On June 23, 2010, the State of São Paulo, the Municipality of São Paulo, the Company and the regulatory agency “Sanitation and Energy Regulatory Agency – ARSESP” signed an agreement to share the responsibility for water supply and sewage services to the Municipality of São Paulo based on a 30-year concession agreement. This agreement is extendable for another 30 years, pursuant to the law. This agreement sets forth SABESP as the exclusive service provider and designates ARSESP as regulator, establishing prices, controlling and monitoring services.

Also, on June 23, 2010, the State of São Paulo, the Municipality of São Paulo and SABESP signed the “Public service provision agreement of water supply and sewage services”, a 30-year concession agreement which is extendable for another 30 years. This agreement involves the following activities:

i. protection of the sources of water in collaboration with other agencies of the State and the City; ii. capture, transport and treat of water; iii. collect, transport, treatment and final dispose of sanitary sewage; and iv. adoption of other actions of basic and environmental sanitation.

The Company operates under an authorization by public deed in some municipalities in the Santos coast region and in the Vale do Ribeira, where the Company started to operate after the merger of the companies that formed it. In September 2015, the Company entered into a water supply and sewage public utility services agreement with the municipality of Santos. Additional information is presented in Note 9(d) of the Annual Financial Statements of December 31, 2015.

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Notes to the Interim Financial Information

Article 58 of Law 11,445/07 determines that precarious and overdue concessions, as well as those effective for an undetermined period of time, including those that do not have an instrument formalizing them, will be valid until December 31, 2010. However, Article 2 of Law 12,693 of July 24, 2012, which amended Article 7-A of Law 11,578 of November 26, 2007, allows program agreements to be executed until December 31, 2016.

The Company’s Management understands that the concession agreements not yet renewed are valid and will be governed by Laws 8,987/95 and 11,445/07, including those municipalities served without an agreement.

Public deeds are valid and governed by the Brazilian Civil Code.

The Company's shares have been listed in the Novo Mercado (New Market) segment of BM&FBovespa under the ticker symbol SBSP3 since April 2002 and on the New York Stock Exchange (NYSE) as American Depositary Receipts (“ADRs”) Level III, under the SBS code, since May 2002.

Since 2008, the Company has been setting up partnerships with other companies, which resulted in the following companies: Sesamm, Águas de Andradina, Saneaqua Mairinque, Aquapolo Ambiental, Águas de Castilho, Attend Ambiental and Paulista Geradora de Energia. Although SABESP has no majority interest in the capital stock of these companies, the shareholders’ agreements provide for the power of veto and casting vote in certain issues jointly with associates, indicating the shared control in the management of investees.

The 2014-2015 water condition presented the lowest rainfall and inflow ever seen in 85 years, especially in the reservoirs composing the Cantareira System. During the rainy season, from October 2015 to March 2016, rainfall in the region returned to the normal levels expected for the period which, jointly with the various measures adopted by the Company to mitigate water shortage impacts, the collaboration of the population in water saving and the emergency works undertaken in 2014 and 2015 resulted in the recovery of water levels in the reservoirs of the Cantareira System.

Consequently, since May 1, 2016, the Water Consumption Reduction Incentive Program. effective since February 2014, and the Contingency Tariff, effective as of January 2015, were cancelled.

The interconnection of the Rio Grande (Billings) Reservoir with the Alto Tietê System was inaugurated in September 2015 and allowed the Alto Tietê System to serve regions previously served by the Cantareira System only. This project enables the transfer of up to 4m³/s from the Rio Grande (Billings) Reservoir to the Alto Tietê System, contributing to water supply and security in the São Paulo Metropolitan Region .

Also regarding the investments designed to increase expansion and water security in the São Paulo Metropolitan Region, two important projects will be concluded in 2017: (i) the Jaguarí-Atibainha interconnection, which will transfer up to 5.13 m³/s to the Cantareira System; and (ii) the construction of the São Lourenço Production System, which will expand the storage, production and distribution capacity by 6.4 m³/s.

The total volume of water stored in our water sources in September 2016 was 495% higher than in the same period in 2015, i.e. in September 2016, stored water totaled 831.9 million m³ versus 139.8 million m³ in September 2015, excluding the technical reserve.

However, in spite of the end of the Water Consumption Reduction Incentive Program and the Contingency Tariff in April, water production has not yet reached pre-crisis levels, showing that consumer habits may have changed.

The Company’s Management expects that with the improvement of water conditions and operating cash, in addition to the lines of credit available for for investments, the Company will have sufficient funds to meet its liabilities and not compromise the investments necessary to water security.

See other disclosures about this matter in Note 24 – operating revenue.

The interim financial information was approved by the Board of Directors on November 10, 2016.

 

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Notes to the Interim Financial Information

2 Basis of preparation and presentation of the financial statements

Presentation of the quarterly financial information

The quarterly financial information as of September 30, 2016, was prepared based on the provisions of CPC 21 (R1) – Interim Financial Information and the international standard IAS 34 – Interim Financial Reporting, issued by the International Accounting Standards Board (IASB), applicable to the preparation of Quarterly Information Form– ITR and they are fairly presented consistent with the rules issued by the Brazilian Securities and Exchange Commission (CVM). Therefore, this Interim Financial Information takes into consideration the official letter CVM/SNC/SEP 003 of April 28, 2011, which allows the entities to present selected notes to the financial statements, in cases of redundant information already disclosed in the Annual Financial Statements. The interim financial information for September 30, 2016, therefore, does not include all the notes and reporting required by the annual financial statements, and accordingly, shall be read jointly with the Annual Financial Statements as of December 31, 2015, prepared pursuant to the International Financial Reporting Standards – IFRS, issued by the International Accounting Standards Board – IASB and pursuant to the accounting practices adopted in Brazil which observe the pronouncements issued by the Brazilian Accounting Pronouncements Committee- CPC.

3 Summary of significant accounting policies

The accounting policies used in the preparation of the quarterly financial information for the quarter ended September 30, 2016 are consistent with those used to prepare the Annual Financial Statements for the year ended December 31, 2015. These policies are disclosed in Note 3 to the Annual Financial Statements.

4 Risk Management

4.1 Financial Risk Management

Financial risk factors

The Company's activities are affected by Brazilian economic scenario, making it exposed to market risk (exchange rate and interest rate), credit risk and liquidity risk. The Company’s financial risk management is focused on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance.

The Company has not utilized derivative instruments in any of the reported periods.

(a) Market risk

Foreign currency risk

SABESP’s foreign exchange exposure implies market risks associated with currency fluctuations, since the Company has foreign currency-denominated liabilities, mainly US dollar and yen-denominated short and long-term borrowings.

The management of SABESP’s foreign currency exposure considers several current and projected economic factors, besides market conditions.

This risk arises from the possibility that the Company may incur in losses due to exchange rate fluctuations that would impact liability balances of foreign currency-denominated borrowings and financing raised in the market and related financial expenses. The Company does not maintain hedge or swap contracts or any derivative financial instrument to hedge against this risk.

A significant amount of the Company’s financial debt is indexed to the U.S. dollar and Yen, in the total amount of R$5,850,794 as of September 30, 2016 (R$6,640,256 as of December 31, 2015). Below, the Company’s exposure to exchange risk:

 

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The 12% decrease in foreign-currency denominated debt between September 30, 2016 and December 31, 2015, was mainly due to the following:

1) Exchange rate changes, due to the 16.9% decrease in the US dollar, from R$3.9048 as of December 31, 2015 to R$3.2462 as of September 30, 2016. The US dollar-denominated debt accounts for 69.1% of foreign currency-denominated debts; and

2) A 2.9% increase in Yen-denominated debt, due to the funding of loan and financing agreements: JICA 19, in the amount of R$144,497. These increases were reduced due to the 1.1% decrease in the Yen exchange rate, which went from R$0.03243 as of December 31, 2015, to R$0.03207 as of September 30, 2016.

As of September 30, 2016, if the Brazilian real had depreciated or appreciated by 10% against the US dollar and Yen, effects on results before taxes on the nine-month period ended September 30, 2016, considering the other variables are as remaining constant, in addition to the impacts mentioned above, would have been R$585,079 (R$664,026 as of December 31, 2015), lower or higher, mainly as a result of exchange losses or gains on the translation of foreign currency-denominated borrowings.

Scenario I below presents the effect in income statements for the next 12 months, considering the projected rates of the U.S. dollar and the Yen. Considering the other variables as remaining constant, the impacts for the next 12 months are shown in scenarios II and III with possible depreciations of 25% and 50%, respectively, in the Brazilian real.

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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 borrowings and financing.

The Company has not entered into any derivative contract to hedge against this risk; however continually monitors market interest rates, in order to evaluate the possible need to replace its debt.

The table below provides the Company's borrowings and financing subject to variable interest rate:

 

Another risk to which the Company is exposed, is the mismatch of the monetary restatement indices of its debts with those of its service revenues. Water supply and sewage services tariff adjustments do not necessarily follow the increases in the inflation indexes to adjust borrowings, financing and interest rates affecting indebtedness.

As of September 30, 2016, if interest rates on borrowings and financing had been 1% higher or lower with all other variables held constant, the effects on profit before taxes for the nine-month period ended September 30, 2016 would have been R$80,367 (R$89,246 as of December 31, 2015), lower or higher, mainly as a result of lower or higher interest expense on floating rate borrowings and financing.

(b) Credit risk

Credit risk arises from cash and cash equivalents, deposits in banks and financial institutions, as well as credit exposures to wholesale basis and retail customers, including outstanding accounts receivable, restricted cash and accounts receivable from related parties. Credit risk exposure to customers is mitigated by sales to a dispersed base.

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Notes to the Interim Financial Information

The maximum exposures to credit risk as of September 30, 2016 are the carrying amounts of instruments classified as cash equivalents, deposits in banks and financial institutions, restricted cash, trade receivables and accounts receivable from related parties at the end of the reporting period. See additional information in Notes 6, 7, 8 and 9.

Regarding the financial assets held with financial institutions, the credit quality that is not past due or subject to provision for impairment can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates. The credit quality of counterparties which are banks, such as deposits and financial investments, the Company considers the lower rating of the counterparty published by three main international rating agencies (Fitch, Moody's and S&P), according to internal policy of market risk management:

 

 

(c) Liquidity risk

The Company's liquidity is primarily reliant upon cash provided by operating activities, borrowings from Brazilian Federal and State governmental financial institutions, and financing in the domestic and international capital markets. The liquidity risk management considers the assessment of its liquidity requirements to ensure it has sufficient cash to meet its operating and capital expenditures needs, as well as the payment of its debts.

The funds held by the Company are invested in interest-bearing current accounts, time deposits and securities, selecting instruments with appropriate maturity or liquidity sufficient to provide margin as determined by projections mentioned above.

The table below shows the financial liabilities of the Company and São Lourenço PPP’s commitments, into relevant maturities, including the installment of principal and future interest to be paid according to the agreement.

 

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(*)The Company also considered future commitments (construction not yet performed) not yet recognized in the financial statements related to São Lourenço PPP, due to the relevance of future cash flows, the impacts on its operations and the fact the Company already has formalized this commitment through an agreement signed by the parties.

Future interest

Future interest was calculated based on the contractual clauses for all agreements. For agreements with floating interest rate, the interest rates used correspond to the base dates above.

Cross default

The Company has borrowings and financing agreements including cross default clauses, i.e., the early maturity of any debt, may imply the early maturity of these agreements. The indicators are continuously monitored in order to avoid the execution of this clause.

(d) Sensitivity analysis on interest rate risk

The table below shows the sensitivity analysis of the financial instruments, prepared in accordance with CVM Rule 475/2008 in order to evidence the balances of main financial assets and liabilities, calculated at a rate projected until the final settlement of each contract, considering a probable scenario (scenario I), appreciation of 25% (scenario II) and 50% (scenario III).

The purpose of the sensitivity analysis is to measure the impact of changes in the market over the financial instruments of the Company, considering constant all other variables. In the time of settlement, the amounts can be different from those presented, due to the estimates used in the measurement.

 

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(i) Refers to the scenario of interest to be incurred for the 12 months as of September 30, 2016 or until the maturity of the agreements, whichever is shorter.

4.2 Capital management

The Company’s objectives when managing capital are ensure its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital.

The Company monitors capital based on the leverage ratio. This ratio corresponds to net debt divided by total capital. Net debt corresponds to total borrowings and financing less cash and cash equivalents. Total capital is calculated as total equity as shown in the balance sheet plus net debt.

 

The leverage ratio decreased from 46% as of December 31, 2015 to 41% as of September 30, 2016, chiefly due to the decreased balance of foreign-currency denominated borrowings and financing as a result of 16.9% and 1.1% depreciations of the US dollar and the Yen, respectively, as of September 30, 2016.

4.3 Fair value estimates

It is assumed that balances from trade receivables (current) and accounts payable to suppliers by carrying amount, less impairment, approximate their fair values, considering the short maturity. Long-term trade receivables also approximate their fair values, as they will be adjusted by inflation and/or will bear contractual interest rates over time.

 

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Notes to the Interim Financial Information

4.4 Financial instruments

The Company had CTEEP’s shares, which were classified as financial asset held for trading and recognized at fair value through profit or loss. As of April 20, 2016, the Company sold these shares for R$111,117. The Company’s financial instruments included in the borrowings and receivables category comprise cash and cash equivalents, trade receivables, related party balances, other receivables, balances receivable from the Water National Agency – ANA, and the financial instruments under other liabilities category comprised accounts payable to contractors and suppliers, borrowings and financing, balances payable deriving from the Public Private Partnership-PPP and program contract commitments, which are non-derivative financial assets and liabilities with fixed or determinable payments, not quoted in an active market.

As of September 30, 2016, the Company did not have financial liabilities classified as fair value through profit or loss.

The estimated fair values of financial instruments are as follows:

Financial assets

 

Additionally, SABESP has financial instrument assets receivables from related parties, in the amount of R$871,301 as of September 30, 2016 (R$872,107 as of December 31, 2015), which were calculated in accordance with the conditions negotiated between related parties. The conditions and additional information referring to these financial instruments are disclosed in Note 9 to this interim financial information and Note 10 to the Annual Financial Statements of December 31, 2015. Part of this balance, totaling R$779,372 (R$786,501 as of December 31, 2015), refers to reimbursement of additional retirement and pension plan - G0 and is indexed by IPCA plus simple interest of 0.5% p.m. This interest rate approximates that one practiced by federal government bonds (NTN-b) with terms similar to those of related-party transactions.

Financial liabilities

 

The criteria adopted to obtain the fair values of borrowings and financing, in preparing the interim financial information as of September 30, 2016, are consistent with those adopted in the Annual Financial Statements for the fiscal year ended December 31, 2015. In the Annual Financial Statements, these criteria are disclosed in Note 5.4.

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Notes to the Interim Financial Information

Considering the nature of other financial instruments, assets and liabilities of the Company, the balances recognized in the balance sheet approximate the fair values, taking into account the maturities close to the end of the reporting period, comparison of contractual interest rates with market rates in similar operations at the end of the reporting period, their nature and maturity terms.

5 Key accounting estimates and judgments

Estimates and judgments are continually evaluated and are based on historical experience and on other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The key accounting estimates and judgments are: (i) allowance for doubtful accounts, (ii) intangible assets arising from concession and program contracts, (iii) provisions, (iv) pension benefits, and (v) deferred income tax and social contribution, and are disclosed in Note 6 to the Annual Financial Statements as of December 31, 2015.

6 Cash and cash equivalents

	September 30, 2016	December 31, 2015
Cash and banks	64,693	77,233
Cash equivalents	1,350,772	1,561,981
	1,415,465	1,639,214

Cash and cash equivalents include cash, bank deposits and high-liquidity short-term financial investments, mainly represented by repurchase agreements (accruing CDI interest rates), deposited at Banco do Brasil, whose original maturities are lower than three months, which are convertible into a cash amount and subject to an insignificant risk of change in value.

As of September 30, 2016, the average yield of financial investments corresponds to 99.29% of CDI (99.24% for financial assets held for trading as of December 31, 2015).

7 Restricted cash

 

(i) Agreement with the municipal government of São Paulo where the Company transfers 7.5% of the Municipal revenue to the Municipal Fund;

(ii) Refers to funds raised with the Brazilian Development Bank– BNDES, awaiting the authorization for use; and

(iii) Refers to savings account for receiving escrow deposits regarding lawsuits with final and unappealable decisions in favor of the Company, which are blocked as per contractual clause.

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(b) Contingent assets - GESP (not recorded)

As mentioned above, as of September 30, 2016 and December 31, 2015, SABESP had contingent assets with GESP, not recorded in assets referring to the additional retirement and pension paid (Law 4,819/58), named “Disputed amounts receivable”, totaling R$910,253 and R$855,054, respectively.

(c) Use of reservoirs – EMAE

Empresa Metropolitana de Águas e Energia S.A. - EMAE plans to receive for the credit and obtain financial compensation for alleged past and future losses in electricity generation, due to water collection, and compensation for costs already incurred and to be incurred with the operation, maintenance and inspection of the Guarapiranga and Billings reservoirs used by SABESP in its operations.

Several lawsuits were filed by EMAE. Currently, an arbitration proceeding is in progress related to the Guarapiranga reservoir and a lawsuit related to the Billings reservoir, both pleading for financial compensation due to SABESP’s water collect for public supply, alleging that this conduct has been causing permanent and growing loss in the capacity of generating electricity of Henry Borden hydroelectric power plant with financial losses.

As of April 10, 2014, the Company issued a Notice to the Market including the information about an eventual future agreement.

As of October 28, 2016, the Company entered into an agreement based on a Private Transaction Agreement and Other Adjustments aimed to fully and completely settle the disputes involving the two companies. The transaction is subject to the condition precedent of approval by the competent bodies of the Company and EMAE, as well as the Brazilian Electricity Regulatory Agency – ANEEL, and involves the payment by SABESP to EMAE of the following amounts:

- R$6,610 annually, adjusted for inflation, as of the execution date of this instrument, by the IPCA or any other index that may replace it, by the last business day of October of each fiscal year, with (i) the first of such annual payments due up to the last business day of October 2017 and (ii) the last payment due up to the last business day of October 2042; and

- R$46,270, in five annual and successive installments, adjusted for inflation by the IPCA or any other index that may replace it, with the first installment of R$9,254 due on April 30, 2017 and the subsequent ones in 04 (four) installments of same amount, due on every April 30 of the subsequent years, or on the first subsequent business day.

The agreement was based on the following assumptions: (i) SABESP payments should not exceed the amount necessary to indemnify EMAE for the maintenance and operating costs of the Guarapiranga and Billings reservoirs, in the proportion of their collect considering the natural outflow of each reservoir; (ii) payments will be made while SABESP’s and EMAE’s concessions are valid, and as long as SABESP withdraws water from these reservoirs, in compliance with the statute of limitations of the objects of the proceedings; (iii) SABESP must request ARSESP to incorporate these expenses into the tariff revision process in progress.

In order to estimate the maintenance and preservation expenses of the hydraulic and property structures of the Billings and Guarapiranga reservoirs, the technical area involved in water production adopted the following assumptions: (i) expenses related to the Guarapiranga Reservoir, whose water is used exclusively to supply the population of the São Paulo Metropolitan Region, will be fully paid by SABESP; (ii) the Billings reservoir has multiple uses – flood control, generation of electricity and public supply – and its maintenance and operating expenses should be shared based on the proportion of water used by each of the functions mentioned; (iii) SABESP has grants to use water in several points of the Billings reservoir that total an available outflow of 10.0 m³/s, representing 61.7% of the reservoir’s long-term average outflow (16.2 m³/s); and (iv) considering the water volume usage percentages - 100% Guarapiranga and 61.70% Billings – an annual amount of R$6,610 will be charged as shared expenses, based on the terms of the agreement.

The Company adopted the annual amount of R$6,610 from 2010 to 2042, including the statute of limitations and the year of expiration of the EMAE concession.

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Notes to the Interim Financial Information

For these reasons, the Company has concluded that it was in its interest to enter into the agreement since: (i) it eliminates the incidence of future risks with the dismissal of all proceedings; (ii) its amount is limited to a reasonable amount to be paid for the sharing of the operating and maintenance costs of the Guarapiranga and Billings reservoirs; and (iii) the form of payment is appropriate to its financial situation.

By entering into the Agreement, all litigation between the parties will cease permanently and the Company will continue using the reservoirs.

In addition to the lawsuits that were part of the Agreement, on April 11, 2016, SABESP was named in the Indemnification proceeding commenced by EMAE’s minority shareholders, who claimed compensation for damages suffered by EMAE, based on the amounts that the latter did not earn due to the decrease in the outflow of these reservoirs and in the generation of electricity as a result of the use of water of the Billings and Guarapiranga reservoirs by SABESP, and also requested that SABESP be sentenced to reimburse the loss of profits related to EMAE’s unearned amounts resulting from the fact that water was not pumped from the Pinheiros and Tietê Rivers to the Henry Borden hydroelectric power plant. In summary, the company claims that the São Paulo State, in its capacity as controlling shareholder of EMAE, has acted unduly to EMAE’s detriment and in favor of SABESP’s interests by allowing and consenting water intake from the Billings and Guarapiranga reservoirs, in detriment to the output of these reservoirs and generation of electricity by EMAE, without the necessary financial compensation, making impracticable the satisfactory use of the Henry Borden hydroelectric power plant. Although this lawsuit was not the object of the agreement, the Company understands that the approval of the agreement by the Extraordinary Shareholders’ Meeting would eliminate the risk that this proceeding would continue in the judicial level.

As of September 30, 2016, the Company recorded R$8,846 and R$29,259 in Other Liabilities, under current and noncurrent liabilities, respectively, which represent the present value of the balance of R$46,270 that will be paid in five annual installments.

As of November 9, 2016, EMAE’s Board of Directors approved the transaction with SABESP, pursuant to the Private Transaction Agreement, in accordance with the Notice to the Market disclosed by EMAE on the same date.

As of November 10, 2016, the transaction was approved by SABESP’s Board of Directors.

(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 municipalities where it operates that benefit from a reduction of 25% in the tariff of water supply and sewage 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 water consumption.

(e) Guarantees

The State Government provides guarantees for some borrowings and financing of the Company and does not charge any fee with respect to such guarantees.

(f) Personnel assignment agreement among entities related to the State Government

The Company has personnel assignment agreements with entities related to the State Government, whose expenses are fully passed on and monetarily reimbursed. From July to September 2016 and 2015, the expenses related to personnel assigned by SABESP to other state government entities amounted to R$2,449 and R$2,439, respectively, and, from January to September 2016 and 2015, they amounted to R$7,659 and R$7,870, respectively.

From July to September 2016, there were no expenses related to personnel assigned by other entities to the Company. In 2015, these expenses amounted to R$91 and, from January to September 2016 and 2015, amounted to R$10 and R$231, respectively.

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The Company acts as a primary responsible to construct and install the infrastructure related to the concession, using own efforts or hiring outsourcing services, receiving the risks and benefits.

As a consequence, the Company recognizes revenue from construction service corresponding to the cost of construction increased by margin. Generally, the constructions related to the concessions are performed by third parties, in such case, the margin of the Company is lower, normally, to cover eventual administration costs, and the responsibility of the primary risk As of September 30, 2016 and 2015 the margin was 2.3%.

Construction margin from July to September and the same period in 2015 was R$24,339 and R$22,254, respectively, and from January to September 2016 and the same period in 2015 was R$57,006 and R$53,881.

(g) Expropriations

As a result of the construction of priority projects related to water and sewage systems, the Company was required to expropriate third-parties' properties, and the owners of these properties will be compensated either amicably or through courts.

The costs of these expropriations are recorded as concession intangible assets after the transaction is concluded. From July to September 2016, the total amount related to expropriations was R$5,466 and from January to September 2016, expropriations totaled R$33,880 (R$4,809 from July to September 2015 and R$43,650 from January to September 2015).

(h) Public-Private Partnership -PPP

SABESP carries out operations related to the PPPs mentioned below. These operations and their respective obligations and guarantees are supported by agreements executed according to Law 11,079/04.

Alto Tietê Production System

As of September 30, 2016 and December 31, 2015, the amounts recognized as intangible asset related to PPP were R$384,896 and R$393,275, respectively.

Between January and September 2016, a discount rate of 8.06% p.a. was used to calculate the adjustment to present value of the agreement. The obligations assumed by the Company as of September 30, 2016 and December 31, 2015 are shown in the next table.

On a monthly basis, SABESP assigns funds from tariffs to the SPE CAB Sistema Produtor Alto Tietê S/A, in the amount of R$9,164, corresponding to the monthly remuneration. This amount is annually adjusted by the IPC –FIPE and is recorded in a restricted account, pursuant to the contractual operating proceeding. Should SABESP comply with its monthly obligations with the SPE, the funds from the restricted account will be released.

The guarantee has been effective since the beginning of the operation and will be valid until the conclusion, termination, intervention, annulment or caducity of the Administrative Concession, or other extinction events provided for in the Concession Agreement or in the law applicable to administrative concessions, including in the event of bankruptcy or extinction of the SPE.

São Lourenço Production System

As of September 30, 2016 and December 31, 2015, the amounts recognized in intangible assets related to PPP were R$1,614,567 and R$699,335, respectively. As of September 30, 2016, a discount rate of 7.80% p.a. was used to calculate the adjustment to present value of this agreement.

The obligations assumed by the Company as of September 30, 2016 and December 31, 2015 are shown in the table below, and the increase in liabilities and intangible assets was due to the progress of the work in 2016.

Payment is scheduled to start in January 2018, four (4) months after the beginning of assisted operations.

After the beginning of the operations, every month SABESP will transfer to the SPE Sistema Produtor São Lourenço S/A funds from tariffs arising from the services provided, in the amount of R$24.4 million, equivalent

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Notes to the Interim Financial Information

(i) Main events in the nine-month period ended September 30, 2016

(a) Debentures

As of March 30, 2016, the Company partially amortized the outstanding debentures of the 19th Issue upon payment of 60% of the nominal unit value of the debentures, totaling R$300,000, plus remuneration and charges due until the date of partial amortization, in the amount of R$11,588.

(b) BNDES

On May 25, 2016, the Company raised R$80,000, corresponding to a portion of agreement 15.2.0313.1, totaling R$747,450. The proceeds from BNDES 2015 will be allocated to support the interconnection of the Jaguari dam, located in the Paraíba do Sul River basin, with the Atibainha dam.

In 2016 funding totaled R$57,252 from agreements in effect, mainly corresponding to the BNDES TIETE III agreement, in the amount of R$50,000.

(c) JICA

In 2016 funding totaled R$144,497, referring to agreement BZ-P19 (JICA 19).

(d) BID

In 2016 funding totaled R$79,420, referring to agreement BID 2202.

(e) BIRD

In 2016 funding totaled R$47,025.

(f) Exchange rate changes

The US dollar rate exchange decreased 16.9%, from R$3.9048 as of December 31, 2015 to R$3.2462 as of September 30, 2016, decreasing debt by R$811,064. In the same period, the Yen decreased 1.1%, from R$0.03243 as of December 31, 2015 to R$0.03207 as of September 30, 2016, decreasing debt by R$20,192.

(ii) Covenants

As of September 30, 2016, the Company had met the requirements set forth by its borrowings and financing agreements.

Regarding the covenants applicable to the agreements entered into with the BNDES, except for agreement 08.2.0169.1 (RMSP), which does not provide for an additional guarantee, only agreements 07.2.0800.1 (Onda Limpa), 09.2.1175.1 and 09.6.0110.1 (Debentures) had an additional guarantee of 20%, given that the cancellation of the additional guarantee occurred only after September 30, 2016. On this date, the portion of monthly receivables that has to be recorded in a restricted escrow account was R$240.7 million.

(iii) Borrowings and financing – Credit Limited

 

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the total basic contribution from the participants.

The non-recurring contribution and incentive to participants who migrated in August 2016 totaled R$30,891 based on the actuarial assessment, of which R$27,426 corresponded to active participants and R$3,465 to assisted participants. Based on the Company’s estimate, which includes the previous balance of R$7,214 corresponding to the migration of 2010, a total of R$39,421 corresponding to the entire process was paid in advance and the surplus paid, of R$1,316, was recorded under “other receivables”.

(iii) PlanG0

Pursuant to Law 4,819/58, employees who started services prior to May 1974 and were retired as an employee of the Company acquired a legal right to receive supplemental pension payments, which rights are referred as "Plan G0". The Company pays these supplemental benefits on behalf of the State Government and makes claims for reimbursements from the State Government, which are recorded as accounts receivable from related parties, limited to the amounts considered virtually certain that will be reimbursed by the State Government. As of September 30, 2016, the Company recorded a defined benefit obligation for Plan G0 of R$2,261,614 (R$2,166,942 as of December 31, 2015).

(c) Profit sharing

The Company recorded as reference to the 2015 Profit Sharing Program, the amount corresponding to one month salary for each employee, depending on performance goals reached. In the third quarter of 2016, a total of R$20,938 was accrued (R$19,207 in the third quarter of 2015). From January to September 2016 and 2015, R$62,860 and R$57,127, respectively, were accrued.

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Comments on the Company’s projections

The projections presented in the Reference Form are annual and not on a quarterly basis. Therefore, the quarterly comparison between the information disclosed in the Reference Form with quarterly results shall not apply

The projections monitoring occurs on annual basis and are disclosed in the Reference Form.

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Reports and Statements / Unqualified Report on Special Review

(Convenience Translation into English from the Original Previously Issued in Portuguese)

Review report on the interim financial statements – ITR

To the Board of Directors and Shareholders

Companhia de Saneamento Básico do Estado de São Paulo – SABESP São Paulo – SP

Introduction

We have reviewed the interim financial information of Companhia de Saneamento Básico do Estado de São Paulo – SABESP (“The Company”), included in the Quarterly Financial Information – ITR referring to the quarter ended September 30, 2016, comprising the balance sheet as of September 30, 2016 and the statement of income and comprehensive income for the three and nine-month periods then ended, and the statements of changes in equity and cash flows for the nine-month period then ended, including the explanatory notes.

Management is responsible for the preparation of the interim financial information in accordance with accounting standard CPC 21(R1) - Interim Financial Reporting and IAS 34 - Interim Financial Reporting, as issued by the International Accounting Standards Board - IASB, as well as for the presentation of this information in accordance with the standards issued by the Brazilian Securities and Exchange Commission - CVM, applicable to the preparation of Quarterly Information - ITR. Our responsibility is to express a conclusion on this interim financial information based on our review.

Review scope

We conducted our review in accordance with the Brazilian and International standards on review engagements NBC TR 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity and ISRE 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively. A review of interim financial information consists of making inquiries, primarily of persons responsible for the financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with the auditing standards and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion on the interim financial information

Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim financial information included in the Quarterly Information Form - ITR referred to above is not prepared, in all material respects, in accordance with CPC 21(R1) and IAS 34, issued by the IASB applicable to the preparation of Quarterly Information - ITR, and presented in accordance with the standards issued by the Brazilian Securities and Exchange Commission -CVM.

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Other matters

Statement of value added

We have also reviewed the statements of value added (DVA) for the nine-month period ended September 30, 2016, prepared under the responsibility of the Company’s management, whose presentation on the interim financial information is required in accordance with the standards issued by the Brazilian Securities and Exchange Commission – CVM applicable to the preparation of Quarterly Information - ITR, and considered as supplementary information by IFRS, which does not require this disclosure. These statements were subject to the same review procedures described above, and based on our review, nothing has come to our attention that causes us to believe that it is not prepared, in all material respects, in accordance with the interim financial information taken as a whole.

Corresponding figures

The corresponding information and figures related to the balance sheet for the year ended December 31, 2015 were audited by another independent auditor who issued a report dated by March 24, 2016 without qualification, and the statement of income and comprehensive income for the three month and nine-month periods and the respective statements of changes in equity and cash flows for the nine-month period ended September, 30 , 2015 were audited by another independent auditor who issued a report dated November 12, 2015 without qualification. The corresponding information and figures of Statement of value added (DVA) for the nine-month periods ended September 30, 2015, were subject to the same review procedures by previous independent auditor, and, based on their review, nothing has come to their attention that causes them to believe that it was not prepared, in all material respects, in accordance with the interim financial information taken as a whole.

São Paulo, November 10, 2016

KPMG Auditores Independentes
CRC 2SP014428/O-6

(Original report in Portuguese signed by)
Marcelo Gavioli
CRC 1SP201409/O-1

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