UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F20‑F

oREGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 20112012

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to _______________________

OR

oSHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report__________________________

Commission file number 001‑31317

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

(Exact name of Registrant as specified in its charter)

Basic Sanitation Company of the State of São Paulo‑SABESP

(Translation of the Registrant’s name into English)

Federative Republic of Brazil

(Jurisdiction of incorporation or organization)

Rua Costa Carvalho, 300
05429‑900 São Paulo, SP, Brazil

(Address of principal executive offices)

Rui de Britto Álvares Affonso

raffonso@sabesp.com.br

 (+
(+55 11 3388 8247)

Rua Costa Carvalho, 300 05429-90005429‑900 São Paulo, SP, Brazil

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act:  None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:  None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

227,836,623683,509,869 Shares of Common Stock

Indicate by check mark if the registrant is a well-knownwell‑known seasoned issuer, as defined in Rule 405 of the Securities Act.

YesþNoo

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

YesoNoþ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

YesþNoo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-TS‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YesþNoo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-acceleratednon‑accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-212b‑2 of the Exchange Act.  (Check one):

Large accelerated filerþAccelerated fileroNon-acceleratedNon‑accelerated filero

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAPoInternational Financial Reporting Standards as issued by the International Accounting Standards BoardþOthero

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow

Item 17oItem 18o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-212b‑2 of the Exchange Act).

YesoNoþ

_________________

______________

(1)   American Depositary Shares, or ADS.ADSs.

___________________

(*)   Reclassification between property, plan and equipment and intangible assets,On January 10, 2013, our board of directors approved a change in the amountsratio of R$139.8 millionAmerican Depositary Receipts (“ADRs”), to common shares on the New York Stock Exchange (“NYSE”), from 1:2 to 1:1.  We have calculated the earnings per ADS and dividends and interest on shareholders’ equity per ADS for the 2012, 2011, 2010, 2009 and 2008, according to a ratio of 1:1 for comparison purposes.

Operating Data

In addition to the R$915.3 million that the State acknowledgesacknowledged that it owesowed us pursuant tounder the November 2008 agreement, we are also negotiating with the State in respect to the further amountsamount that the State does not recognizeaccept that it owes us.  While we continue to negotiate directly with the State, weWe are not able to assure you that we will be successful in these negotiations.  Accordingly, as of December 31, 2011,2012, we have not recorded R$1,290.71,351.2 million related to reimbursementsthe reimbursement that we believe areis due to us for the pension benefits we paid on behalf of the State,State’s behalf, but we have recorded R$1,512.11.547.2 million in pension obligations.

We cannot assure you when or if the State will pay the totalremaining overdue amounts owed toit owes us.  Due to the State’s history of not making timely payments topaying us in respect ofa timely manner for water and sewage services, and of not reimbursing us in a timely manner for the payments of pensionspension benefits we paid on its behalf, of the State, we cannot assure you that the amount of accounts receivableaccount receivables owed to us by the State and some State entities will not significantly increase in the future.

In addition, certain municipalities and other government entities also owe us money.  See “—We may face difficulties in collecting overdue amounts owed to us by municipalities to which we provide water on a wholesale basis and municipal government entities.”

A state controlled company that has a concession to produce energy in the Guarapiranga and Billings reservoirs may require us to pay damages for the use of water from these reservoirs.

Empresa Metropolitana de Águas e Energia S.A., or EMAE, may require us to financially compensate them for our use of water from the Guarapiranga and Billings reservoirs, which they view as a loss of electricity that could otherwise be generated and sold. Additionally, payments to EMAE, which we were supposed to have made by a specific deadline, were not made. As such, EMAE has requested compensation from us. In the event water from these reservoirs was no longer made available to us, we would have to bring water in from locations further away, which would increase the risk of not being able to provide adequate service in the region, as well as an increase in water transportation costs.

The majority shareholder of both EMAE and us, the state of São Paulo, may force a resolution regarding the dispute of water use from the Guarapiranga and Billings reservoirs, which may have an adverse affect on our business.

Additionally, in the event we are required to make  payments and compensation, our cash position and overall liquidity may be adversely affected.

We may be required to acquire reservoirs that we use and that are owned by a State-controlled company, or we may be required to pay substantial charges tofor the owner with respect to our use of these reservoirs.reservoirs that are not our property.

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

Risks Relating to Our Business

We cannot anticipateThe Brazilian Basic Sanitation Law is still in the effects that further developmentsprocess of implementation and interpretation, and doubts remain as to its full impact on the industry.  ARSESP, the regulator, has the function to implement regulations under the Basic Sanitation Law within the State of São Paulo, and its interpretation willis in the process of reviewing, implementing and proposing changes to São Paulo State water and sewage regulations, including potentially significant changes to the tariff methodology and structure applicable to our business.  The current regulatory uncertainty, and any of the changes that are currently proposed, may have an adverse effect on the basic sanitation industry in Brazil and on us.our business.

Although Law No. 11,445, or the Basic Sanitation Law, was enacted on January 5, 2007.  While it has been in effect for more than five years, it is still insince early 2007, the full implementation of a number of its early stages of implementation in Brazil, and we continueprovisions remains subject to be unable to anticipate all of the effectsregulations that it might have on our operations and business.  There are still several uncertainties related to the interpretation of the Basic Sanitation Law.  On June 21, 2010, the federal government enactednot yet been published.  Federal Decree No. 7,217, regulatingwhich was enacted on June 21, 2010, and Law 11,445 implemented a first series of new principles under the Basic Sanitation Law.  Among other things, Law, No. 11,445 and Federal Decree No. 7,217 provided that (i)including the following:

·for public‑public partnership contracts (or program contracts), public hearings regarding themust be held with respect to bid announcements, and technical and economic viability studies are requirements for the validity of public-must be carried out;

public partnership contracts (program contracts) ; (ii) ·the rights and obligations including penalties, of customers and service providers, shall be ruledincluding penalties, are determined by the owner of the public service, not by the regulatory agency; (iii)

·the technical and financial feasibility may be demonstrated by meansviability of the requirement for new investments, other thanprovision of water and sewage services should be determined based on (i) capital contributions necessary to offer the proceeds arisingservices and (ii) expected revenues from the renderingprovision of services;the service; and (iv)

·when a regulated service is divided and renderedto be provided by different service providers, the services will be considered as interdependent and will be subject tothose providers must execute an agreement that will regulate the activities of the different services providers.  regulating their respective activities. 

We cannot currently anticipate all the effects that the lawBasic Sanitation Law and the decree will have on our business and operations, if any.

·A tariff revision of to a rate of 2.3509% was implemented in April 2013 pursuant to Resolution No. 406. Additionally, we will pass an inspection fee of 0.5% to consumers immediately after the conclusion of the operational adjustments necessary for the inclusion of this rate in the bills to municipalities where it will be subjectcharged.

·Resolution No. 407 authorizes us to their regulation, supervision and limitations to our services. We cannot foresee any changes that any such new agency may implement regarding our business, and if the changes are unfavorable, they could materially and adversely affect us.

Pursuantpass on to the Basic Sanitation Law,service bill legal charges defined by municipal legislation, which under the Program Contracts and the Sewage and Water Supply Service Contracts must be considered in the tariff revision.

In April 2013, ARSESP has enacted, in 2009, certain rules establishing (i)passed Resolution No. 413, which effectively suspended Resolution No. 407, thereby postponing the general conditionsauthorization for the services we render, (ii)passing on of a municipal tax to consumers’ bills, which, prior to this Resolution, had been established in Resolution No. 407. The final decision regarding Resolution No. 407 has been postponed until August 2013.

In August 2012, ARSESP published Resolution No. 346, which established the communication processprinciple that users should be compensated for any failureinterruptions in our services; (iii) penalties for deficiencies in the provision of basic sanitation services; and (iv) procedures for confidential treatment of our clients’ private information.  We are currently evaluating the enforceability and legality of some of these rules.water supply.  Implementation of these rules started during 2011 and is expected to continue for the next few years.  The implementation of these rules will impact our commercial and operations processes and may adversely affect us as described below and in other ways we cannot currently predict.this regulation has been suspended pending further technical discussions.

In particular, regarding changes to the general conditions for our services, in 2011, the ARSESP altered the standard contract that we are required to use in our relationships with retail costumers. The ARSESP changed the rule regarding the collection of water and sewage tariff,customers, requiring that collectioninvoices be directedsent to the consumer of our services,the service rather than to the owner of the served property, as used to be the case.property.  We estimate that this change will affect ongoing legal disputes, particularly those regarding collection procedures, as well as business discussions in general.  However,Since this change is still being implemented, we are not currently able to predict its impact on our business.

In 2009 ARSESP enacted rules regarding the following:

·general terms and conditions for water and sewage services;

·procedures for communication regarding any failure in our services;

·penalties for deficiencies in the provision of basic sanitation services; and

·procedures for confidential treatment of our customers’ private information.

We are currently evaluating the enforceability and legality of some of these rules.  Implementation of these rules started during 2011, is currently ongoing, and is expected to continue for the next few years.  The implementation of the above mentioned rules will impact our commercial and operations processes, and may adversely affect us in ways we cannot currently predict.

The Basic Sanitation Law also allows municipalities to create their own regulatory agencies rather than being subjected to overview by ARSESP, and a number of municipalities have therefore created their own regulatory agencies.  For example:

·The municipality of Lins, which had decided in 2007 to create its own regulatory authority, revisited this decision in 2010 and transferred the regulation of water activities in Lins, including the setting of tariffs, to ARSESP.  Lins has retained, however, the power to ultimately approve the tariff set by ARSESP.

·The municipalities in which the hydrographic basins of the Piracicaba, Capivari and Jundiaí rivers are located created a consortium for the regulation and supervision of our activities in that area in 2011.  We are currently involved in legal proceedings in which this consortium is claiming that it has jurisdiction over our activities in the municipality of Piracaia and that ARSESP has no right to regulate our activities or set tariffs in the municipality.  We cannot predict the outcome of this change oncase or how it may impact our business, as the change is still being implemented. business.

If other municipalities create new agencies or retain regulatory powers, we will be subject to regulation and supervision by them and to any limitations on our services that they may set.  We cannot foresee any changes that any such new agency may implement regarding our business.  If any such changes are unfavorable, they could materially and adversely affect us.

For more information on ARSESP regulations, see “Information on the Company—Business Overview—Tariffs,” “Information on the Company—Business Overview—Government Regulation——”Tariff Regulation in the State of São Paulo” and “Information on the Company—Business Overview—Government Regulation—Consumer“Consumer Relations in the State of São Paulo.”

New joint entities will be set up to oversee basic sanitation services in metropolitan regions, including the São Paulo Metropolitan Region.  We cannot predict how the shared management of these operations will be carried out in the São Paulo Metropolitan Region and other metropolitan regions we operate or what effect this may have on our business, financial condition or results of operations.

There are some pending cases before the Brazilian Supreme Court regarding whether the right to execute concession and program agreements in metropolitan regions belongs to the State or the municipal government.  On February 28, 2013 the Brazilian Supreme Court decided a pending case on this matter related to the State of Rio de Janeiro.  A majority of the court held that the State of Rio de Janeiro and municipal governments must set up new joint entities to oversee the planning, regulation and auditing of basic sanitation services in metropolitan regions.  On March 6, 2013, the court ruled that this decision would come into effect after a 24-month period over the State of Rio de Janeiro.  Such decision may be considered a relevant precedent on this matter and therefore similar decisions may be taken on other pending cases as well as on new cases that can be initiated.  The São Paulo metropolitan region (including the municipalities to which we provide water on a wholesale basis), one of which new decisions on such pending or new cases may apply, accounted for 74.1% of our gross revenue from services in 2012 (excluding revenues relating to the construction of concession infrastructure).  We cannot predict how the shared management of these operations could be carried out in the São Paulo Metropolitan Region and other municipalities we operate or what effect it may have on our business, financial condition or results of operation.

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

OurThe provision of water and sewage services in the cityCity of São Paulo accounted for 55.1%54.7% of our gross operating revenues from sales and services (excluding revenues relating to the construction of concession infrastructure) in the year ended December 31, 2011.2012.

On June 23, 2010, the State and the cityCity of São Paulo entered intoexecuted an agreement in the form of a convention (convênio) with the intermediation, to which we and our consent and the consent of the ARSESP pursuant toconsented, under which they agreed to jointly manage the planning of and investment infor the basic sanitation system of the cityCity of São Paulo among other things.  This agreement established that theon a joint basis.  The principal terms of thisconvênio were as follows:

·The State and the cityCity of São Paulo would enter into anexecute a separate agreement with us, granting us exclusive rights with respect to the provision ofprovide water and sewage services in the cityCity of São Paulo.  In addition, the agreement established the role of the

·ARSESP in regulatingwould regulate and overseeingoversee our activities (includingregarding water and sewage services in the tariffs we collect) and established aCity of São Paulo, including tariffs.

·A management committee (Comitê Gestor) that willwould be responsible for planning the water and sewage services for the City and for reviewing our investment plans.  The management committee will be composedconsists of six members appointed for two yeartwo-year terms.  The State and the cityCity of São Paulo will have the right to appoint three members each.  We are permitted tomay participate in themanagement committee meetings of the management committee; however, we arebut may not afforded any voting rightsvote.

Also, on June 23, 2010,In application of theconvênio, we entered intoexecuted a formal agreementseparate contract with the State and the cityCity of São Paulo, also dated June 23, 2010, to regulate the provision of these services.  This agreement requires, among other things, (i) thatservices for the estimated investments mentionedfollowing 30 years.  The principal terms of this contract are as follows:

·The total investment stated in the agreement comply withcontract must be equal to 13% of the gross revenuerevenues from the municipalityprovision of services to the City of São Paulo, net of the taxes on revenues. The investment plan, upon its execution by us,revenues, which total approximately R$500 million per year.

·We must be compatible with the activities and programs included in the sanitation plan of the State, Municipality, and if necessary, of the Metropolitan region. The invest plan is not irrevocable and will be reviewed by our management committee every four years, especially the investments to be executed in the subsequent period; and (ii) that we contributetransfer 7.5% of the gross revenues from saleswe derive under theconvênio, and services we obtain from this agreement, net ofsubtract (i) COFINS and PASEP taxes, and (ii) unpaid bills of publicly owned properties in the city of São Paulo, to the Municipal Fund for Environmental Sanitation and Infrastructure (Fundo Municipal de Saneamento Ambiental e Infraestrutura),  or the São Paulo Municipal Sanitation Fund, established by Municipal Law No. 14,934/2009.  In addition,

·Our investment plan must be compatible with the agreement provides thatsanitation plans of the State, the City of São Paulo and, if necessary, the Metropolitan region.

·ARSESP will ensure that the tariffs charged (a) will adequately compensate us for the services we provide and (b) canthat tariffs may be adjusted in order to restore the original balance between each party’s obligationobligations and economic gain (equilíbrio econômico-financeiromico‑financeiro).  

We currently have an investment plan in place that reflects these obligations and addresses their compatibility with the activities and programs includedsanitation plans for 363 in which we operate, that includes the sanitation plan of the State and of the municipalityCity of São Paulo and if necessary, the plan of the metropolitan region of São Paulo. ThisMetropolitan region.  The investment plan is not irrevocable and will be reviewed by aour management committee every four years, so asparticularly with respect to ensure compliance with government policies and contractual terms. the investments to be executed in the subsequent period.

Because we were not previously required to makeinvest 13% of our gross revenues or transfer 7.5% of our gross revenues to the mandatory allocationsSão Paulo Municipal Sanitation and Infrastructure Fund as described in items (i) and (ii) above, they were not taken into account in calculating our existing tariff and its adjustment formula.  Despite the contractual provisions and the ARSESP’s role in setting and adjusting adequate tariffs, which are necessaryformula do not account for our economic and financial balance, we cannot guaranteethese requirements.  Although ARSESP is required to ensure that the tariffs we will be allowed to chargeadequately compensate us for the provisionservices we provide, and ARSESP has published Resolution No. 407 authorizing us to pass on specified charges to the municipalities and include these charges in our tariff revisions, Resolution No. 407 has not yet been implemented and the final decision concerning this has been postponed until August 2013.  If we cannot pass on these charges to our customers, our financial condition and results of water and sewage servicesoperations could be materially adversely affected.  For further information see “Risk Factors – Risks Relating to Our Business – The Brazilian Basic Sanitation Law is still in the city of São Paulo will continue to adequately compensate us. 

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

Our provision of water and sewage services in the metropolitan regions in which we operate is governed by agreements with the relevant State authorities (other than in the city of São Paulo, where we now have an agreement with the municipal authorities as well as the State). In a lawsuit initiated by third parties that is currently before the Brazilian Supreme Court, the Court is considering whether the State or the municipal governments have the proper authority to plan and regulate basic sanitation services rendered in metropolitan regions, as well as the right to execute concession and program agreements.  If the Brazilian Supreme Court grants this authority to municipal governments, under certain circumstances, we may be required to cease our operations in certain metropolitan regions where we have agreements with the State only, to the extent that those municipalities opt to use another water and sewage service provider.  To mitigate this risk, we have commenced a process of executing agreements with both the Stateimplementation and the municipal governments of certain metropolitan regions,interpretation, and we already have such agreements regarding thecity of São Paulo.  We cannot anticipate the effects of the Brazilian Supreme Court decisiondoubts remain as to its full impact on the provision of our services in other metropolitan regions, which could have a material adverse effect on us.

Any of these public bidding processes.  If we participate in these public bidding processes, we cannot assure you that we will win the bid.  In the event that these municipalities assume the direct provisionevents could have a material adverse effect on our business, results of wateroperations and sewage services or promote a public bidding process to select another water and sewage service provider, or the new terms or conditions of the concession or program agreements are less favorable to us, we may be materially and adversely affected.financial condition.  See “Item 4.B. Business Overview—OurOperations” and “Item 4.B. Business Overview—Government Regulation—Concessions—Public Consortia and Cooperation Agreement Law for Joint Management.”

For further information on these lawsuits,proceedings, see “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings.”

We cannot assure you that otherOther municipalities will notmay seek to terminate their concession agreements before the contractual expiration date.  The early termination of concession agreements by municipalities, our inability toIf this occurs and we do not receive adequate indemnification for theour investments, we made, or the payment of indemnification dueis paid over an extended period, we may suffer material harm to our financial position.

We may face difficulties in collecting overdue amounts owed to us by municipalities to which we provide water on a wholesale basis and municipal government entities.

As of December 31, 2012, our total accounts receivable was R$4,098.0 million.  Of this amount, certain municipalities to which we provide water on a wholesale basis owed us R$1,677.7 million, and certain municipal government entities owed us R$792.1 million.  Of the total amount owed by municipalities, R$174.3 million was overdue by between 30 and 360 days and R$1,453.3 million was overdue by over a long period, may have a material adverse effect on us.360 days.

The Basic Sanitation Law has established provisions governing the indemnification ofBrazilian courts are entitled to obligate us to continue to supply water and sewage service providers in case of early termination of concession agreements by a municipality and reduced the term over which indemnification must be paid to four years.  These provisions are also applicable to concession agreements entered into prior to the enactment of the Basic Sanitation Law, as long as these concession agreements do not have a contractual indemnification provision in case of early termination ormunicipalities, even when we have not otherwise entered into an agreementreceived payments due to us.  We have no way of ensuring that negotiations with these municipalities or legal action taken against the municipalitymunicipalities will result in payments being made.  Some entities associated with regardmunicipal governments for which we provide services also do not make regular payments.  We cannot guarantee if or when these entities will make payments on a regular basis or pay the amounts owed to such early termination.  Nevertheless,us.  If the municipalities and related entities do not pay the amounts owed to us, we cannot anticipate the effects of the Basic Sanitation Law on the amount of, and enforceability of the rightmay suffer material harm to indemnification and how Brazilian courts will enforce the provisions of the Basic Sanitation Law.our financial position. 

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

Our capital expenditure program will require substantial liquidity and capital resources of approximately R$7.99.9 billion in the period from 2013 through 2016.  In 2012 through 2015.  Wewe recorded R$2.42.5 billion ofin capital expenditure in 2011 in connection with our capital expenditure program.expenditures.

We have funded these capital expenditures with cash generated by our operations as well as borrowings in the past,Brazilianreais and foreign currencies, and we planintend to continue to fund our capital expenditures from these expenditures with funds generated by operations and domestic and foreign currency borrowings on acceptable terms.sources.  A significant portion of our financing needs havehas been funded by lenders controlledprovided by the Brazilian federal government.public government banks.  We also benefit fromhave obtained long‑term financing at attractive interest rates from multilateral agencies and domestic and international governmental development banks.  If the Brazilian government changes its policies regarding the financing of water and sewage services, or if we fail to obtain long‑term financing at attractive interest rates from domestic and international multilateral agencies and development banks atattractive interest rates.  Changes in the policies of the federal government regarding the financing of water and sewage services, or our failure to continue to benefit from long-term financing from domestic and international multilateral agencies and development banks at attractive interest ratesfuture, we may impair our abilitynot be able to meet our obligations or finance our capital expenditure program, which could have a material adverse effect on us.our business and financial condition.

We are subject to cost increases to complyCompliance with environmental law requirementslaws and potential environmental liability thatpayments could have a material adverse effect on us.

Our facilitiesWe are subject to extensive Brazilian federal, state and municipal laws and regulations relating to the protection of human health and the environment. These laws and regulations establishset water potability standards for consumption and limit or prohibit emissionsthe discharge or spillsspillage of effluents,effluent produced in our operations, particularly raw sewage.  We occasionally suffer accidents such as raw sewage, producedleakages or breaks in connection with our operations.pipes that could lead to liability for damages under environmental law.  We could be subject to civil public actions andvarious types of criminal, administrative and other civil proceedings for non-compliancenon‑compliance with environmental laws and regulations, which could expose us to administrative and civil penalties and criminal sanctions, such as fines, closure orders and significant indemnification obligations.  SinceThe scope and enforcement of environmental laws and their enforcement by Brazilian authoritiesin Brazil are becoming more stringent, and our capital expenditures and expenses for environmental compliance costs may increase substantially.  Expenditures required for compliance withsubstantially as a result.  These expenses may lead us to reduce expenditure on strategic investments, which could harm our business.  In addition, Brazilian courts are enforcing environmental laws and regulationsmore stringently than in the past, which may result in reductions in other strategic investmentsfines or liability for damages that are significantly higher than those we have planned, which could negatively affect us.  In addition, due to more stringent enforcement of environmental laws by Brazilian courts, we may be required to pay substantial fines and indemnifications in amounts that may vary widely from those currently anticipated.anticipate.  We are presently a party to various environmental proceedings that could have a numbermaterial adverse impact on us, including civil processes and investigations relating to the release of civil public actionsuntreated sewage into waterways and administrative proceedings related to environmental matters, with regard to which we are unable to calculate our estimated amountthe disposal of potential liability.  sludge generated by treatment plants.Any unfavorable judgment in relation to these lawsuits and proceedings, or any material unforeseen environmental liabilities, may have a material adverse effect on us.  For further information on these lawsuits,proceedings, see “Item 8.A. Financial Information—ConsolidatedInformation-Consolidated Statements and Other Financial Information—LegalInformation-Legal Proceedings.”  For further information on investments in environmental programs, see “Item 4.A - Main Projects of our Capital Expenditure Program,” “Item 4.B – Busniess Overview – Sewage Treatment and Disposal ,” “Item 4.B – Business Overview - Environmental Matters” and “Item 4.B – Business Overview - Environmental Regulation.”

The enactment of newNew laws and regulations relating to climate change and changes in existing regulation, as well as the physical effects of climate change, may result in increased liabilities and increased capital expenditures, which could have a material adverse effect on us.

As newCurrent federal, state and municipal laws and regulations relating toon climate change including carbon controls, become applicableestablish global goals, which we intend to meet  concerning greenhouse gas emissions and this may require us and as existing environmental regulations relating to climate change become more stringent, it is possible thatincrease our capital expenditure for compliance with these laws and regulations will increase substantiallyinvestments in the future.  If we increase capital expenditureorder to comply with these laws and regulations,laws. Currently, however, if we increase our capital expenditures for this purpose, we may be required to reduce expenditureexpenditures on other strategic investments.

In addition, if climate change leadsmay lead to significant physical effects,increases in extreme weather events such as variations in the intensity of droughts andor torrential rain, which may affect our ability to deliver our services may be affected and we may be required, among other things, to:  (i) make significant investmentsrequire us to take action such as:

·investing in seeking new water sources located further from major consumer centers and (ii) make significant investmentscenters;

·investing in new technologies.technologies;

·adopting water conservation practices and implementing alternative demand management systems such as economic mechanisms or educational programs; and

·increasing our reserve capacity.

We have not adopted any method for calculatingattempted to evaluate the investments that wouldmay be necessary in the eventas a result of a significant physical effect from climate change.  Any substantialIt may require us to increase in expenditure related to climate change,expenditures, whether for compliance with changes in environmental regulations or for preventing or remedying the physical effects of climate change,change.  We may have a material adverse effect on us.be required to adopt new standards aimed at improving energy efficiency and minimizing emissions of greenhouse gases when we renew our operating systems licenses or seek to obtain licenses for new ventures.  See “Item 4.B. Business Overview—Environmental Matters—Climate Change Regulations:  Reduction of Greenhouse Gases (GHG).”

An increase in sea levels could cause additional intrusion of salt water in the river estuaries where we collect water for treatment, which could generate problems in our treatment, water supply and sanitation systems in coastal areas, including physical damage to facilities and networks.  Additionally, increases in air temperature could affect demand for water.  Climate change may also reduce water levels in the reservoirs that power hydroelectric plants in Brazil, which may cause energy shortages and increase electricity prices, which may adversely affect our costs and operations.

We cannot predict all of the effects of climate change. We have not provisioned any funds for climate change events as current technology and  contrasting scientific understandings of climate change make it difficult to predict potential expenses and liabilities.  We may need to make substantial new expenditures, either to comply with new environmental regulations linked to climate change or to prevent or correct the physical effects of climate change, any of which could have a material adverse effect on our results of operations. 

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

Our industry is affected by the following additional risks relating to the provision of water and sewage services:

·The state and federal government agencies that manage water resources impose substantial charges for the abstraction of water from bodies of water and the discharge of sewage.  We may not be able to pass these charges on to our customers.  See “Item 4.B. Business Overview—Government Regulation—Water Usage.”

·The degradation of watershed areas may affect the quantity and quality of water available to meet demand from our customers.  See “Item 4.A. History and Development of the Company—Capital Expenditure Program” and “—Main Projects of Our Capital Expenditure Program.”

·In addition to the risks discussed under “—The terms of our new agreement to provide water and sewage services in the City of São Paulo could have a material adverse effect on us,” we may not be able to increase our tariffs on a timely basis, or at all, in order to pass on increases in inflation or operating expenses, including taxes, to our customers.  These constraints may have an adverse effect on our ability to fund our capital expenditure program and financing activities, and to meet our debt service requirements.  See “Item 5.A.  Operating and Financial Review and Prospects—Factors Affecting Our Results of Operations—Effects of Tariff Increases.”

·In addition to the risks discussed under “— New laws and regulations relating to climate change and changes in existing regulation, as well as the physical effects of climate change, may result in increased liabilities and increased capital expenditures, which could have a material adverse effect on us,”we are exposed to various weather-related risks, since our financial performance is closely linked to climate patterns.  The expected increase in the frequency of extreme weather conditions in the future may adversely affect both the quality and quantity of waters available for abstraction, treatment, and supply.  Droughts could adversely affect the water supply systems, resulting in a decrease in the volume of water distributed and billed as well as in the revenue derived from water supply services.  An increase in heavy rainfall could impact water quality and the regular operation of water sources, including abstraction of waters from our dams, due to increased soil erosion, silting, pollution and eutrophication of aquatic ecosystems.  See “Item 5.A. Operating and Financial Review and Prospects—Factors Affecting Our Results of Operations—Effects of Climate Change (Drought and Intense Rainfalls).”

·We are dependent upon energy supplies to conduct our business.  Any shortages or rationing of energy may prevent us from providing water and sewage services, and may also cause material damage to our water and sewage systems when we resume operations.  Also, we may not be able to pass on any significant increases in energy tariffs to our customers.  See “Item 4.A. History and Development of the Company‑Energy Consumption.”

Any of the above may have a material adverse effect on us.

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

Risks Relating to Our Common Shares and ADSs

We may not always be in a position to pay dividends or interest on shareholders’ equity and ADSs.

Depending on our future results, our shareholders may not receive dividends or interest on own capital if we do not generate a profit.  Despite the requirement to distribute a minimum of 25% of our annual net income to shareholders, our future financial position may not permit us to distribute dividends or pay interest on own capital.

The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell our common shares underlying the ADSs at the price and time you desire.

Investing in securities that trade infrom emerging markets such as Brazil often involves greater risk than investing in securities of issuers in major securities markets, and these investments are often considered to be more speculative in nature.  The Brazilian securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets.  Accordingly, although you are entitled to withdraw the common shares underlying the ADSs from the depositary at any time, your ability to sell the common shares underlying the ADSs at a price and time at which you wish to do so may be substantially limited.  There is also significantly greater concentration in the Brazilian securities market than in major securities markets.  The ten largest companies in terms of market capitalization represented approximately 53.1%51.8% of the aggregate market capitalization of the BM&FBOVESPA as of December 31, 2011.2012.  The top ten stocks in terms of trading volume accounted for approximately 50.4%43.0%, 48.8%47.2% and 47.0%48.8% of all shares traded on the BM&FBOVESPA in 2009,2012, 2011 and 2010, and 2011, respectively.

Investors who exchange ADSs for common shares may lose their ability to remit foreign currency abroad and to obtain Brazilian tax advantages.

The Brazilian custodian for the common shares underlying our ADSs must obtain a certificate of registration from the Central Bank in order to be entitled to remit U.S. dollars abroad for payments of dividends and other distributions relating to our common shares or upon the dispositionsales of our common shares.  If an ADR holder decides to exchange ADSs for the underlying common shares, thisthe holder will be entitled to continue to rely on the custodian’s certificate of registration for five business days from the date of exchange.  After that period, the holder may not be able to obtain and remit U.S. dollars abroad upon the dispositionsale of our common shares, or distributions relating to our common shares, unless he or she obtains his or her own certificate of registration or registerregisters under Resolution No. 2,689, dated January 26, 2000, of the CMN, which entitles registered foreign investors to buy and sell on thea Brazilian stock exchanges.exchange.  If the holder does not obtain a certificate of registration or register under Resolution No. 2,689, thisthe holder will generally be subject to less favorable tax treatment on gains with respect to our common shares.

If a holder attempts to obtain his or her own certificate of registration, the holder may incur expenses or suffer delays in the application process, which could delay his or her ability to receive dividends or distributions relating to our common shares or the return of his or her capital in a timely manner.  We cannot assure you that theThe custodian’s certificate of registration or any foreign capital registration obtained by a holder may not be affected by future legislative changes, or thatand additional restrictions applicable to the holder, the disposition of the underlying common shares or the repatriation of the proceeds fromof disposition will notmay be imposed in the future.

A holder of common shares or ADSs may face difficulties in protecting his or her interests as a shareholder because we are a Brazilian mixed capital company.

We are a mixed capital company (sociedade de economia mista) organized under the laws of Brazil, and all of our directors and officers and our controlling shareholder reside in Brazil.  All of our assets and those of these other persons are located in Brazil.  As a result, it may not be possible for a holder to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil.  Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certainrequirements are met, a holder may face difficultiesmore difficulty in protecting his or her interests in the case of actions by our directors, officers or our controlling shareholderthan would shareholders of a corporation incorporated in a state or other jurisdiction of the United States.  In addition, under Brazilian law, none of our assets which are essential to our ability to render public services are subject to seizure or attachment.  Furthermore, the execution of a judgment against our controlling shareholder may be delayed, as payment ofsince the State may only be able to pay a judgment must be made pursuant to the State’sif it is provided for in its budget in a subsequent fiscal year.  None of the public property of our controlling shareholder is subject toavailable for seizure or attachment, either prior to or after judgment.

We are also evaluating and may consider creatingthe formation of an investment vehicle expected to be known as Sabesp Participações through which we may makeintend to expand our business through equity investments.

We intend to continue to selectively seek new business opportunities to take advantage ofin which we may leverage our know-how,know‑how, size and scale.

Establish efficient and competitive ways of attracting, retaining and motivating our personnel.  We intend to become a reference in human resource management, providing our personnel with growth opportunities and recognition.  We seek to raise workplace satisfaction levels by establishing programs for the professional and personal development of our employees, particularly of those in managerial positions, setting attractive compensationcompetitive benefit packages and creating a healthy and collaborative work environment.

According to the IBGE, the GDP of the State of São Paulo was approximately R$1.11.2 trillion in 2009,2010, representing approximately 33% of Brazil’s total GDP, and making it the largest economy of any state in Brazil based on GDP.  According to the IBGE, the State of São Paulo is also the leading Brazilian state in terms of manufacturing and industrial activity, with a strong position in car manufacturing, pharmaceuticals, computer manufacturing, steel making and plastics, among other activities, as well as a leading position in the banking and financial services industries.  The State of São Paulo is the most important exportingleading export state in Brazil, according to the Brazilian Ministry of Development, Industry and Foreign Trade (Ministério do Desenvolvimento, Indústria e Comércio Exterior). 

History

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

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

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

Our capital expenditure budget for our capital expenditures is subject to approval ofby the State legislative chamber.  This approval is obtained simultaneously with the approval of the budgets of the Department of Sanitation, of the Department of Energy and of the State of São Paulo.  The Company isWe are also subject to supervision from the Court of Audit of the State of São Paulo (“Tribunal de Contas do Estado de São Paulo”), with regard to our accounting, financial and budgetary operationalactivities and our operating assets.

We provide water and sewage services directly to a large number of residential, commercial and industrial private consumers, on top ofas well as to a variety of public entities, in 363 of the 645 municipalities in the State, including in the city of São Paulo, as well as providing treatedPaulo.  We also supply water on a wholesale basis to six municipalities located in the São Paulo metropolitan region and to the municipality of Sumaré, in which we do not operate thewater distribution systems, to consumers. Amongand five of these municipalities we also provideutilize our sewage treatment services to five of them.services.  Currently, we are a leading provider ofthe fifth largest water and sewage servicesservice company in the world in terms of number of clients, according to the 1314^th edition of thePinsent Masons Water Yearbook (2011-2012) (2012‑2013).

In 1994, we were registered with the CVM as a publically-heldpublicly-held company and are therefore subject to rules issued by the CVM,CVM’s rules, including those relating to the periodic disclosure of extraordinary facts or relevant events.  Our common shares have been listed on the BM&FBOVESPA under the ticker “SBSP3” since June 4, 1997.

In 2002, we joined theNovo Mercado segment of the BM&FBOVESPA, which is the listing segment in Brazil with the highest corporate governance requirements.  During thatIn the same year, we registered our securitiescommon shares with the Securities and Exchange Commission, or SEC, and started trading our shares in the form of American Depositary Receipts – level III (“ADRs”) on the New York Stock Exchange, or NYSE.

In 2004, the State of São Paulo carried out a secondary offer of common shares held by the State of São Paulo was made simultaneouslyour company in the Brazilian and in the international market.markets.  On December 1, 2007, we became part of the BM&FBOVESPA Corporate Sustainability Index, or ISE, which reflects our high degree of commitment to sustainable environmental and social practices.

In December 2007, Law No. 1,025, allowedwhich provided for the creation of regulatory agencies for the supervision of water and sewage services. The same lawservices, created ARSESP, the regulatory agency that regulates and supervises the services we provide.

In JulySince 2008, we announcedhave expanded into various activities that we would expand the area reached bycomplement our water and sewage services, as well as including in our scope of services activities related to environmental and energy solutions, as required by the State Law No. 1,025. Since then, we have also been formingoften through partnerships with private companies to consolidate our operations insuch as the sanitation sector, in particular: (i) through afollowing:

·We have created four special purpose entity which provides services of water distribution and/or sewage treatment for certain municipalities in the State; (ii) we entered into a consortium with the consultancy firm Latin Consult to provide consultancy services in certain cities in Panama and Honduras for the rational use of water and the adoption of a new commercial and operational management model; (iii) the production, supply and commercialization of reused water and (iv) the implementation and operation of a station for the preconditioning of non-domestic wastewater, sludge conditioning and other related activities.

Other partnership led to the creation of the following companies: Sesammcompanies (SESAMM – Serviços de Saneamento de Mogi Mirim S/A; Águas de Castilho S.A.,; Águas de Andradina S.A., Saneáqua; and Saneaqua Mairinque S.A.) to operate water and/or sewage concessions granted by four municipalities in the State of São Paulo, all of which are already operating.

·We are planning to install small hydroelectric power plants in our water treatment plants in Guaraú and Cascata in conjunction with the Servitec/Tecniplan consortium.  We expect to start construction of the first two plants, with capacities of 4 and 2 MW, in the first half of 2013.

·In partnership with the consultancy firm Latin Consult, we are providing consulting services to theInstituto de Acueductos y Alcantarillados Nacionales, the company responsible for water and sewage services in the central provinces of Panama, in the field of sustainable water use and to implement a new model for commercial and operational management.

·Also in partnership with Latin Consult, we are providing consulting services to nine municipalities in Honduras to implement a new commercial and operational management model.

·We have set up Aquapolo Ambiental S.A. Águas de Castilho S.A. e, a joint venture with a private sanitation services operator, which commenced operations in the second half of 2012 and operates the largest water recycling facility in the southern hemisphere, supplying up to 1,000 liters per second to industries in the Capuava petrochemical cluster in the São Paulo metropolitan region.

·We have set up Attend Ambiental, a joint venture with Estre Ambiental S.A., which is constructing a pre‑treatment and processing plant for non-domestic effluent in the São Paulo metropolitan region that is expected to commence operations in September 2013.

Although we do not necessarily hold a majority capital participationstake in these companies, shareholderthe shareholders’ agreements provide us with veto powers or qualified votes on certain matters those business associates may come across.matters.

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

Cab Spat during the first two years of the PPP is estimated at R$320.0 million.  Cab Spat willhas also undertaken to perform maintenance on the dams of the Alto Tietê System, in connection with which Cab Spat will also provideSystem’s dams on an ongoing basis.  This maintenance work consists of civil engineering, electromechanical and operational services, as well as sludge treatment, and the corresponding services regarding water adduction and water supply.

The total value of theestimated cost for this project is estimated at R$1.0 billion.  We intend to pay these investments over 15 years upon the completionAs of the contracted projects and services.  In December 2011, the services were concluded and the system’s nominal capacity was increased from 10 to 15 cubic meters per second, directly benefiting 1.5 million people in the east region of the São Paulo metropolitan region, in addition to improving the reliability, flexibility and availability of the integrated water system that services the state’s metropolitan region.  The increase in production will improve the east, north and west regions water supply levels since it will be possible to transfer water from the east system to other localities.  In 2011,31, 2012 we had invested approximately R$ 121.4 million in this project.350 million.

Tietê Project

The Tietê river crosses the São Paulo metropolitan region and receives most of the region’s run‑off and wastewater.  The environmental status of the river reached a critical level in 1992.  In an effort to reverse the situation, the State of São Paulo created a recovery program designed to reduce pollution of the Tietê river by installing sewage collection lines along the banks of the Tietê river and its tributaries.  These lines collect raw sewage and deliver it to our sewage treatment facilities.  We completedcarried out the first phase of the program between 1992 and 1998.

In connection with the first phase of the Tietê Project, (Projeto Tietê), in June 1998, we completed the construction of three additional sewage treatment facilities and invested ain June 1998.  This involved total investment of US$1.1 billion, of which US$450.0450 million was financed by the Inter-AmericanInter‑American Development Bank, or IADB, approximately US$100 million by theCaixa Econômica Federal,, or the Caixa, and approximately US$550 million by us.

·removal and transport of the drainageeffluent for treatment (branchthrough branch collectors and interceptors),interceptors; and (iii) 

·the construction between 2009 and 2016 of new sewage treatment plants not only of the integrated drainage system ofin the São Paulo metropolitan region, but also of various isolated systems in the same region, during a six-year period from 2010 to 2016.  region. 

Approximately 43%45% of the work for the third phase is already under executionconstruction, and 25%a further 26% is undergoingin the process of public bidding processes.  Aftertender.  Following completion of the third phase of the Tietê Project, the sewage collection system will benefitserve an additional 1.5 million people and the sewage treatment system will benefitserve an additional 3.0 million people.  We have invested R$698 million in the third phase, R$328 million of which during 2012.

We are currently planning the fourth and final phase of the Tietê Project, which should take placeis expected to be constructed between 20132014 and 2018.2020.  The main objective of the fourth phase ifis to completelyput an end the dumpingto all discharge of untreated sewage into the Tietê river in the area infor which we are the water services provider.

Corporate Program for Reduction of Water Loss Reduction 

The objective of the Corporate Program for Reduction of Water Loss Reduction (Programa(Programa Corporativo de Redução de Perdas)Perdas de Água) is to decreasereduce water losses moreloss efficiently by means of the integrationintegrating and expansion of theexpanding existing initiatives in our business units.  WeThis program has a 12‑year term that began structuring the program in the second half of 2007 and finalized it in 2008.2009.  We have invested R$1.0 billion in this project so far, including R$328.0 million invested in 2012, and anticipate total investments of approximately R$4.35.5 billion throughout the program’s 11-year term beginning in 2009.of the program.  Funding for the program will come from our own resources as well as from loan agreements entered with the Japan International Cooperation Agency (JICA), withcredit facilities provided by JICA, Caixa Econômica Federal and with BNDES.  The program aims to reduce the incidence of water loss from 436 liters per connection per day in December 2008 to 211280 liters per connection per day in 2019,2020, which is equivalent to reducing water lossesloss from 27.8% in December 20082009 to 15.0%19% in 2019. This goal will be revised based on the results reached so far and the expected reduction with the implementation of the Corporate Program for Water Loss Reduction in the 2012-2019 period.

In 2011, we invested approximately R$326.7 million in this program.2020.  As of December 31, 2011,2012, the water loss index remained relatively stable at 25.7%.  Our aim was to keep the water loss index at 25.2% but this was not possible due to (i) contractual difficulties in our efforts to reduce losses were reducedin theBaixada Santistaarea, we have since become party to 25.6% from 26%new contracts, (ii) difficulty in 2010.replacing service connections, specifically in urban areas, and (iii) more accuracy in water volumes in the Guaraú Water Treatment Station which is located within our main water producing system.

Regional Systems Investment Programs

We currently have a number of projects in progress and planned for theour Regional systems, including projects relatingSystems.  These relate to the abstraction of water andas well as to the collection, removal and final disposal of sewage.  We invested approximately R$1,091.0 million,1.2 billion, R$943.7 million1.1 billion and R$1,109.2 millions,0.9 billion in these projects in 2009,2012, 2011 and 2010, and 2011, respectively, and we have budgeted for additional capital expenditures of approximately R$ 2.22.8 billion from 20122013 through 2015.2016.

Clean Wave Program

The main goals of the Clean Wave Program (Programa Onda Limpa) are to improve and expand the sewage systems in the municipalities comprising the Baixada Santista metropolitan region, increasing the sewage collection rate to 95.0%95%, and treating 100.0%100% of the collected sewage, and thereby improving bathing water quality at 82 beaches in the region by 2013.  On August 6, 2004, we entered into a credit agreement with the JBIC forend of the financingdecade.  This project is being carried out in two phases, the first of this project,which has started and the second of which is guaranteedin the planning phase.  The first stage is expected to be completed by 2016, aiming at increasing the Federative Republic of Brazil,sewage collection rate to 82%.  The funds will come from our own resources as well as from loan agreements entered with JICA and from the Government Severance Indemnity Fund for a total amount of R$382.8 million.  On October 1, 2008, the JICA incorporated the loan transactions of the JBIC.  For further information on the agreement entered into with the JICA, see “Item 5.B. Liquidity and Capital Resources—Capital Sources.”  Employees(Fundo de Garantia por tempo de Serviço), or FGTS.

As of December 31, 2011,2012, we had invested approximately R$1.61.7 billion in this program, R$ 159.8 millionof which R$135.7 millionwas invested during 2012.  As a result, sewage collection increased from 53% to 71%, and the year 2011 treatment of collected sewage rose from 96% to 100%. With

After completing the completion of construction of sewage treatment plants and installation of networks, we have prioritizedare prioritizing the connection of costumerscustomers to the sewage collection system.  UntilAs of December 31, 2012, we had completed 79,000 domestic connections, compared to a target of 123,000 at the same date.

Additionally, complimentary works of the first stage shall be executed between 2013 and 2016, including an addition of 37 thousand sewage connections due to the population increase motivated by the economic development of the region.  We expect to evaluate the service of sewage collection rate by 82% by the end of 2011, we had finished 63,000 connectionsthis phase.  These works have an approximated investment value of R$400 million and are currently being bid for.

The second phase is in planning for the total 123,000 expected.period between 2015 and 2020.

Northern Coast Clean Wave Program

The Northern Coast Clean Wave Program (Programa Onda Limpa Litoral Norte) will expandaims at expanding the collection and treatment of sewage inon the Northernnorthern coast of the State of São Paulo, intending to benefit 600 thousand people, including the local population as well as tourists that each year visit the region.  By 2015, theregion each year.  The program willaims to increase the collection and treatment of sewage rate in the region from 36.0% in 2008 to 85.0%, seeking to improvethereby improving the health and well-beingwell‑being of the population in addition toand stimulating economic development through thean increase in tourism in the region.tourism.

In 2011,During 2012, we continued workingwork on two sewage treatment plants in the city of São Sebastião and other sewage system projects in the cities of Ubatuba, Ilhabela and São Sebastião, which we expect to complete in 2013.  Until 2011,The funds will come from our own resources, as well as from loan agreements entered with BNDES, with Caixa Econômica Federal and from the FGTS.  As of December 31, 2012, we had invested R$114.6125.9 million had already been invested in this program, of which R$ 24,624.3 million werewas invested during 2012.  We expect to invest a total of R$500.0 million in 2011.this project by 2018.

During the first phase of December 31, 2011, R$472.7 million has been invested on this program we have focused on increasing water production from the Mambu/Branco water system in order to satisfy demand and we expect to investR$1.1 billionimprove water quality in the program by 2013.  The Mambu/Branco Water Production System issouthern part of this program.  It will increase water production to supply municipalities in the south of the Baixada Santista increasingmetropolitan region.  This phase, which is approaching finalization, aims to increase production from actualMambu/Branco from 0.6 cubic metermeters per second to 1.6 cubic meters per second.  Additionally,

As of December 31, 2012, we had invested R$569.1 million in this program, of which R$129.3 million was invested during 2012.  We expect to invest a total of R$1.1 billion in this project by the planned water treatment stationsend of Jurubatuba, Itú and Cubatão are also part of this program.2013.

New Policies and Programs

Nossa Guarapiranga

In December 2011, we launched the Nossa Guarapiranga project, whosethe main objective of which is to recoverremediate the water quality ofin the Guarapiranga basin, which is a water source for the São Paulo metropolitan region.  WeThe basin serves one million people directly in the areas near Guarapiranga, and indirectly serves a further two million people who consume the water from the basin.  Through capital investment of R$12.2 million, we installed 11 drains to collect residue from rivers in the Guarapiranga basin.  We plan to collect an average of 20 cubic meters of residue per day.The fund will come from our own funds.

Pró-Conexã‑Conexão

In December 2011, the municipality of São Paulo approved a project to offer residences of low-income families subsidizedsubsidize connections to the sewage system.system for low‑income families.  The project involves capital expenditure amountsexpenditures of up to R$349.5 million 80% of which would80% will be sustainedprovided by the State government and 20% by us.  In the first year of the Stateprogram we completed approximately 700 connections, which was less than our initial goal but focused on areas of importance for water sources such as the southern part of the São Paulo while 20% would be paid by us.metropolitan region, near the Billings reservoir.  We believe that this program will increase the efficiency of our sewage collection programs and help improve water quality ofin the region’s rivers and basins, on top ofas well as improving the quality of life of low-incomefor low‑income families.

We expect that thethis program will create 192192,000 new thousand connections over the next 8eight years, and affectbenefiting approximately 800 thousand people.

Water is Life

In November 2011, we created the programThe Water is Life whichprogram, established in November 2011, aims to provide water and sewage services to 41 low-incomelow‑income and isolated communities of non-urbanized areas of 20 municipalities in the regions of Alto Paranapanema and Vale do Ribeira.  After installing the required infrastructure, an estimated capital expenditure of R$6 million, we will be responsible for maintaining and operating the sewage systems to reachRibeira, covering approximately 13 thousand people.  In this project we are responsible for supplying water to, and the municipalities are responsible for installing, Individual Sanitary Units (Unidades Sanitárias Individuais), a technology designed for low‑income and isolated communities.  Regarding the supply of water, we invested approximately R$700 thousand in well drilling.  We expect to invest approximately R$15.6 million by 2014.  An amount of approximately R$6 million was estimated for sewage infrastructure contruction, to be financed by the State Government.  However, this estimated funding is currently being increased to support this project.

B.Business Overview

Our Operations

As of December 31, 2011,2012, we provided water and sewage services to 363 municipalities in the State of São Paulo either under concession agreements, program agreements, under another formother forms of legal arrangementarrangements or under nowithout formal agreement.agreements.  We also supply treated water on a wholesale basis to six municipalities located in the São Paulo metropolitan region and to the municipality of Sumaré.  Pursuant to articleregion.  Article 2 of our bylaws our corporate purpose includespermits us to carry out the following activities:  provision of water supply and sewage services, urban rain water management and drainage services, urban cleaning services and solid waste management services.  In addition, our bylaws authorize us to carry out other related activities, including the planning, operation and maintenance of production systems, the storage, preservation and trading of energy, and the trading of services, products, benefits and rights that, directly or indirectly, result from our assets, projects and activities, and the right to operate a subsidiary anywhere in Brazil or abroad to provide the services mentioned above.