·        “ADR” or “ADRs” are to American Depositary Receipt or American Depositary Receipts, respectively;

·        “ADS” or “ADSs” are to American Depositary Share or American Depositary Shares, respectively;

·        “Brazil” are to the Federative Republic of Brazil;

·        “Central Bank” are to the Central Bank of Brazil;

·“Coverage” indicators are to (a) the number of homes that are actually connected to the water network or sewage collection network, plus the number of homes for which the water and sewage networks are available for connection but which are not connected to those networks (referred to as “feasible” or “connectable” homes), as a portion of (b) the total number of homes within the urbanized service area covered by our contract with the municipality (i.e., the “serviceable area”);

·        “CVM” are to theComissão de Valores Mobiliários, the Brazilian regulator of securities;

·        “federal government” and “Brazilian government” are to the federal government of the Federative Republic of Brazil and “state government” are to the state government of the State of São Paulo;

·        “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil;

·        “Regional Systems” are to the area where the regional systems’ executive office operates, comprising 326328 municipalities in the interior and coastline regions of the state of São Paulo;

·        “São Paulo metropolitan region,” with respect to our operations, are to the area where the metropolitan executive office operates, comprising 38 municipalities, including the city of São Paulo;

·        “sewage coverage ratio”Service” indicators are to the ratio between(a) the number of residenceshomes that are actually connected to the water network or sewage collection network, divided byas a portion of (b) the total number of urban residences inhomes within a certaingiven serviceable area;

·        “State”Sewage Treatment Coverage” indicators are to the amount of consumer units connected to the sewage treatment system;

· “State” are to the State of São Paulo, which is also our controlling shareholder;

·        “U.S. dollars” or “US$” are to the United States dollar, the official currency of the United States;

·        “water coverage ratio” are to the ratio between the number of residences connected to the water supply network, divided by the number of urban residences in a certain area; and

·“water “water crisis” are to the drought we have experienced from late 2013 and throughout most of 2015.  This drought, iswas the most serious drought that our service region has experienced in 85 years, and primarily affectsaffected the Cantareira System, our largest water production system.

Information in this annual report related to liters, water and sewage volumes, number of employees, kilometers, water and sewage connections, population served, operating productivity, water production, water and sewage lines (in kilometers), water loss index and investment in programs has not been audited.

Market Information

We make statements in this annual report about our market share and other information relating to Brazil and the industry in which we operate.  We have made these statements on the basis of information from third-party sources and publicly available information that we believe is reliable, such as information and reports from the BraziliantheBrazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or IBGE, and the State Data Analysis System Foundation (Fundação Sistema Estadual de Análise de Dados), or “SEADE”, among others.  We have no reason to believe that any of this information is inaccurate in any material respect.

Our contracts and the Municipalities We Serve

Throughout this document, we refer to the 364366 municipalities we serve and to our 367369 water contracts.  This difference results from the fact that we have two partial water contracts with the municipality of Mogi das Cruzes.  These contracts are partial because pursuant to them we serve only two neighborhoodsHowever, as the majority of thisthe municipality and, asis serviced on a result, do not includewholesale basis, Mogi das Cruzes has not been included in the total number of municipalities we serve.  Most of our contracts with the municipalities we serve are concession agreements which have a term of 30 years.  On August 2, 2015,In November 2016, we signed a water supply contract with the municipality of Santa Isabel,Branca, which only became effective in January 2016.February 2017.  Therefore, we do not include Santa Branca among the water contract with Santa Isabel amongst the 364366 municipalities we serviced in 2015.2016.

·        the size and growth of our customer base and its consumption habits;

(1)ADS - American Depositary Share.

(2)On April 22, 2013, our shareholders approved a stock split, following which each common share represented three new common shares.  Therefore, per share information in the selected financial data has been revised to give effect to the stock split retrospective to all periods presented.

(3)    Translated at the commercial selling rate at closing for the purchase of U.S. dollars, as reported by the Central Bank, as of December 31, 20152016 of R$3.9048 3.2591to US$1.00.

(4)(2)    Data for 2012 and 2011 havehas been restated in application of IAS 19 – Employee Benefits (as revised in 2011) and IFRS 11 – Joint Arrangements, as described in our audited financial statements for the year ended December 31, 2013.  With respect to IAS 19 – Employee Benefits, the principal adjustment is the change in the accounting record method of actuarial gains and losses, such that accumulated differences between actuarial estimates and actual obligations are recognized in Other Comprehensive Income when they occur. 

Balance Sheet Data

(1)(3)    ADS - AmericanADS-American Depositary Share.

(2)(4)On April 22, 2013, our shareholders approved a stock split, following which each common share represented three new common shares.  Therefore, per share information in the selected financial data has been revised to give effect to the stock split retrospective to all periods presented.

• (1)TreatedOur previous indicator for treatment of collected sewage, which was based on the volume of sewage treated as a percentage of the total volume collected, sewage.has now been replaced by an indicator known as the “Index of Consumer Units Connected to Sewage Treatment”, which represents the amount of consumer units connected to the sewage treatment system.
• We adopted new indicators regarding coverage and service provision based on our service concession areas or “serviceable areas.”  The “serviceable area” is equal to the urbanized service area (urban areas and rural areas with urban characteristics), as defined for purposes of our contract with the respective municipality for purposes of our provision of services.  The “coverage” indicator represents the area in which the water and sewage networks are made available for connection, while the “service” indicator represents the households that are connected to these networks:
  • The “coverage” indicator is equal to (a) the number of homes that are actually connected to the water network or sewage collection network,plus the number of homes for which the water and sewage networks are available for connection but which are not connected to those networks (referred to as “feasible” or “connectable” homes), as a portion of (b) the total number of homes within the urbanized service area covered by our contract with the municipality (i.e., the “serviceable area”). 
  • The “service” indicator is equal to (a) the number of homes that are actually connected to the water network or sewage collection network, as a portion of (b) the total number of homes within a given serviceable area.

Since 1999, following Brazil’s implementation of a floating rate regime, the Central Bank has not directly intervened in the exchange market.  However, the Central Bank, using financial instruments at its disposal, may buy and sell foreign currency in the market in order to influence the exchange rate and decrease volatility with respect to the Brazilianreal.,and did so at various points during 2016.  We cannot predict whether the Central Bank or the Brazilian government will continue to let therealfloat freely or will intervene in the exchange rate through a currency band system or other procedure.  Therealmay fluctuate against the U.S. dollar substantially in the future.  For further information on this risk, see “Item 3.D. Risk Factors—Risks Relating to Brazil—Exchange rate instability may adversely affect us and the market price of our common shares or ADSs”.

Exchange rate fluctuations will affect the U.S. dollar equivalent of therealprice of our common shares on the São Paulo Stock Exchange (BM&FBOVESPA S.A. ‑Bolsa de Valores, Mercadorias e Futuros), or the “BM&FBOVESPA”, as well as the U.S. dollar equivalent of any distributions we make inreaiswith respect to our common shares.

The following tables set forth the selling rate, expressed inreaisper U.S. dollar (R$/US$), for the periods indicated:

D.     Risk Factors

Risks Relating to Brazil

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

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

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

·          interest rates;

·          exchange rates and exchange controls and restrictions on remittances abroad;

·          currency fluctuations;

·          inflation;

·          liquidity of the Brazilian capital and lending markets;

Uncertainty over whether the Brazilian government will change policies or regulations affecting these or other factors may contribute to economic uncertainty in Brazil and to heightened volatility in Brazilian securities markets and securities issued abroad by Brazilian issuers.  On September 9, 2015, Brazil was downgraded below investment grade by Standard & Poor’s Financial Services LLC on September 9, 2015, and received a further downgrade by the same rating agency on February 17, 2016.  In addition, on December 16, 2015, Brazil was downgraded below investment grade by Fitch Ratings Inc. on December 16, 2015 and inby Moody’s Investors Service, Inc. on February 24, 2016.  Following the impeachment of former President Dilma Rousseff, the Vice-President Michel Temer formally took office on August 31, 2016, by Moody's Investors Service, Inc..announcing a series of economic reforms.  We cannot assure you that the Brazilian government will continue with its current economic policies, or that these and other developments in Brazil’s economy and government policies will not, directly or indirectly, adversely affect our business and results of operations.

Political conditions may have an adverse impact on the Brazilian economy and on our business.

Current political conditions in Brazil may affect the confidence of investors and the public in general as well as the development of the economy.  UncertaintyFollowing the impeachment of former President Dilma Rousseff on August 31, 2016, uncertainty remains with regard to matters such as the presidential administration’s future policies and appointments to influential governmental positions and ongoing investigations into allegations of corruption in state-controlled enterprises, which may also affect the confidence of investors and the general public.  It may also have an adverse impact on the Brazilian economy, our business, financial condition, results of operations and the market price of our common shares and ADSs.

Currently, Brazilian markets are experiencing heightened volatility due to the uncertainties derived from the ongoing Lava Jato investigation, being conducted by the Office of the Brazilian Federal Prosecutor,Prosecutor’s Office, and its impact on the Brazilian economy and political environment.  Members of the Brazilian federal government and of the legislative branch, as well as senior officers of large state-owned and private companies, are facing allegations of political corruption, involving alleged bribes by means of kickbacks on contracts granted by the government to several infrastructure, oil and gas and construction companies.  Certain of these companies are also facing investigations by the Brazilian Securities Commission (Comissão de Valores Mobiliários), or CVM, and the U.S. Securities and Exchange Commission, or the SEC.  Members of the Brazilian federal government and of the legislative branch, as well as senior officers of large state-owned companies have faced allegations of political corruption, since they have allegedly accepted bribes by means of kickbacks on contracts granted by the government to several infrastructure, oil and gas and construction companies.  The profits of these kickbacks allegedly financed the political campaigns of political parties of the current federal government coalition that were unaccounted for or not publicly disclosed, as well as servedin addition to alleged personal enrichment of the recipients of the bribery scheme.bribes.  As a result, a number of senior politicians, including congressmen and officers of the major state-owned and private companies in Brazil, have resigned and/or have been arrested, and certain senior elected officials and other public officials are being investigated for allegations of unethical and illegal conduct identified during theLava Jatoinvestigation.

The potential outcome of these investigations is uncertain, but they have already an adverse impact on the image and reputation of the implicated companies, and on the general market perception of the Brazilian economy.  We cannot predict whether such allegations will lead to further political and economic instability or whether new allegations against government officials will arise in the future.  In addition, we cannot predict the outcome of any such allegations nor their effect on the Brazilian economy.

The development of such unethical conduct casesDevelopments in these proceedings and investigations could adversely affect our business, financial condition and results of operations.

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

Depreciation of therealagainst the U.S. dollar could create inflationary pressures in Brazil and cause increases in interest rates, which could negatively affect the growth of the Brazilian economy as a whole and harm our financial condition and results of operations, curtail our access to financial markets and prompt government intervention, including recessionary governmental policies.  Depreciation of therealagainst the U.S. dollar could also lead to decreased consumer spending, deflationary pressures and reduced economic growth.

In the event of a significant devaluation of therealin relation to the U.S. dollar or other currencies, our ability to meet our foreign currency denominated obligations could be adversely affected because our tariff revenue and other sources of income are denominated solely inreais.  In addition, because we have debt denominated in foreign currencies, any significant devaluation of therealwill increase our financial expenses as a result of foreign exchange losses that we must record.  We had a total foreign currency denominated debt of R$6,617.85,660.4 million as of December 31, 20152016 and we anticipate that we may incur additional amounts of foreign currency denominated debt in the future.  In 2015,2016, our results of operations were negativelypositively affected by the 47.0% depreciation16.5% appreciation of therealagainst the U.S. dollar, and a depreciationthe appreciation of the real against the yen by 46.0%13.8%, which together led to a R$1,992.01,090.5 million negativepositive impact on our foreign exchange result, net.  We do not currently have any derivative instruments in place to protect us against a devaluation of thereal in relation to any foreign currency.  A devaluation of therealmay adversely affect us and the market price of our common shares or ADSs.  For more information, see Note 5(a) ofto our 20152016 financial statements.

For further information on exchange rate instability impacts, see “Item 5.B. Liquidity and Capital Resources—Capital Sources—Indebtedness Financing—Financial Covenants”.

Following the elections for State governor in 2014, the re-elected governor appointed Mr. Jerson Kelman as our Chief Executive Officer in January 2015, and Mr. Benedito Pinto Ferreira Braga Junior, the Secretary of State for the State Secretariat for Sanitation and Water Resources (Secretaria de Saneamento e Recursos Hídricos do Estado de São Paulo), was elected our Chairman for the current board of directors’ term of two years, ending in April 2016.  Mr. Benedito Pinto Ferreira Braga Junior’s term was renewed in our annual general shareholder’s meeting held onOn April 29, 2016, he was reelected for another two years,term, ending in April 2018.  Future changesChanges in policy by State government may cause changes in all or some of the members of our management, which may have a material adverse effect on our business and results of operations.

The State and some State entities owe us substantial unpaid debts.  We cannot assure you as to when or whether the State will pay us.

Historically, the State and some State entities have delayed payment of substantial amounts owed to us related to water and sewage services.  As of December 31, 2015,2016, the State owed us R$66.377.4 million for water and sewage services.  Additionally, the State also owes us substantial amounts related to reimbursements of State‑mandated special retirement and pension payments that we make to some of our former employees for which the State is required to reimburse us.  

With respect to payment of pensions on behalf of the State, we had a contested credit amount of R$855.1937.0 million as of December 31, 2015.2016.  We do not record this contested amount as a reimbursement credit for actuarial liability due to the uncertainty of payment by the State.  In addition,as of December 31, 2015,2016, we had a provision for an actuarial liability in the amount of R$2,166.92,512.1 million with respect to future supplemental pension payments for which the State does not accept responsibility.  On March 18, 2015, we, the State and DAEE, with the intervention of the Department of Sanitation and Water Resources, executed a terman agreement providing for payment of agreement, in the amount of

We have entered into agreements with the State to settle the overdue amounts that relate to water and sewage services.  For a detailed discussion of these agreements, see “Item 7.B. Related Party Transactions, Agreements with the State of São Paulo” and Note 10 of our 20152016 financial statements.

Although the State has complied with agreements negotiated with us in past years, we cannot assure you when or if the State will pay the contested credit amount, which is still under discussion, and the remaining overdue amounts it owes us.  The amounts owed to us by the State for water and sewage services and reimbursements for pensions paid may increase in the future.

In addition, certain municipalities and other government entities also owe us payments.  See “Risks Relating to Our Business—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”.

EMAE, a State-controlled company that has a concessionOur right to produce energy indraw water from the Guarapiranga and Billings reservoirs is seeking damages frommay be challenged if another company that uses the reservoirs does not approve a settlement agreement with us for the water we draw from these reservoirs.

We draw water for use in the São Paulo metropolitan area from the Guarapiranga and Billings reservoirs.  Empresa Metropolitana de Águas e Energia S.A., or EMAE, a company that is also controlled by the State of São Paulo, that has a concession to produce hydroelectric energy using water from the same reservoirs.  EMAE commenced various lawsuits against us in the Guarapiranga and Billings reservoirs, ispast seeking compensation from us for the water we draw from these reservoirs.  EMAE has commenced various court and arbitration proceedings, alleging that our water use reduces their ability to generate and sell electricity.  As statedThose lawsuits have now been settled in principle, by way of an Announcement to the Market that we issued on April 10, 2014, we are negotiating with EMAE regarding a potential settlement of this water use dispute, although no agreement has yet been finalized. 

In addition, the State of São Paulo, which is controlling shareholder of bothbetween EMAE and our company may(which is summarized under “Item 7.  Major Shareholders and Related Party Transactions”).  That settlement agreement cannot take action to resolve the disputeeffect, however, until it has been has been approved by our company, EMAE and ANEEL.  It has already been approved by our company, and was approved by ANEEL on December 30, 2016; but it must still be approved by EMAE’s shareholders in a way that has an adverse effect on our business.  On April 11, 2016 weshareholders’ meeting.

We were also named in legal proceedingsa separate lawsuit commenced by minority shareholders of EMAE against the State of São Paulo.Paulo, as controlling shareholder of EMAE.  The plaintiffs in these proceedingsminority shareholders are seeking an order to require the State to stop us from drawing water from the reservoirs without paying compensation to EMAE, and to allow EMAE to pump water from the reservoirs for its hydroelectric facility.  The plaintiffs in these proceedings allege that the State, in its capacity as controlling shareholder of EMAE, has acted unduly to EMAE’s detriment and in favor of our company.  The settlement agreement between EMAE and us will not necessarily put an end to this separate lawsuit.

If the settlement agreement is not approved in the EMAE shareholders’ meeting, or if the ongoing lawsuit by the minority shareholders of EMAE requires the State to make a different decision regarding water use, our ability to draw water from the Guarapiranga and Billings reservoirs may be compromised.  If we were no longer able to draw water from these reservoirs, we would have to transport water from locations farther away, which would increase our water transportation costs and may affect our ability to provide adequate service in the region. In addition, if we are required to pay compensation to EMAE, our cash position and overall liquidity may be adversely affected.

We may be required to pay substantial charges for the use of reservoirs that are not our property.

We use the Billings and Guarapiranga reservoirs in order to provide water services.  We are entitled to withdraw water from these reservoirs under a grant from DAEE.  We are not currently charged for the use of these reservoirs and 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 to utilize these reservoirs.  If we were required to pay substantial charges or additional maintenance or operational costs for our use of these reservoirs, we could be materially and adversely affected.

Risks Relating to Our Business

The measures we took to mitigate the effects of the drought that occurred in 2014 and 2015 resulted in a significant decrease in the volume of water billed and revenues from services we provide which had a material adverse effect on our company and, coulddespite the discontinuation in May 2016 of the measures that were used to face the drought, new consumption habits were incorporated and the volume of water billed and revenues from services we provide continue to do so if the drought escalates in severity.be impacted by those measures.

We experience decreases in our water availability from time to time due to droughts.  The southeastern region of Brazil, particularly the southern region of Minas Gerais State and the Piracicaba, Capivari and Jundiaí river basin, or “PCJ River Basin” (from which we extract most of the water used in the Cantareira System), and the northern area of the São Paulo metropolitan region have experienced below average rainfall since 2012.from 2012 to October 2015.  In the October 2013 – March 2014 rainy season, rain levels and water inflow into the reservoirs reached the lowest levels stream flow measurements

We cannot guarantee that we shall be authorized to extract the same  The volume of water from thisin the Cantareira system that we extracted prior towas 932 million m³ as of March 31, 2017, which represents 73.4% of its maximum storage capacity, including the drought to serve the needs of the population we service.technical reserve.  In December 2015, 5.3 2016, 7.6million inhabitants were serviced by this system, compared to 8.95.4 million in February 2014.December 2015.  For more information about the water crisis, see “Item 4.B. Business Overview—The CurrentRecent Water Crisis”.

The drought has prompted a continuous reduction in the volume of water billed and thus a reduction in revenue.  In 2014, ourthe water volume billed decreased 3.1% and ourthe gross operational revenue fell by 6.7% compared to 2013.  In 2015, ourthe water volume billed decreased 8.0% and our gross operational revenue increased slightly by 0.5% compared to 2014.  Therefore, there wasIn 2016, the volume of water billed increased 4%, and may continuethe gross operational revenue increased by 24.3% compared to be a negative impact on2015.  We cannot assure you that our financial ratios linkedconsumers will revert to revenue, such as the debttheir pre-crisis consumption habits or, if at all, when this will occur.  If consumers do not revert to EBITDA ratio.  We are required to maintain certain financial ratios at specified levels pursuant to restrictions and covenants of our existing debt agreements and failure to maintain these ratios may lead to a default under such agreements.  Breach of any such covenant may result in a default under certain of our debt agreements and, due to customary cross-default provisions, could permit some of our creditors to accelerate our indebtedness unless we are able to renegotiate the terms of these agreements or receive waivers from the affected creditors.  If such events were to occur,their pre-crisis consumption habits, our financial condition wouldcould be adversely affected.  See “Item 5.B. Liquidity and Capital Resources—Indebtedness Financing—Financial Covenants”.

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

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

·        The increasing 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 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 4.B. Business Overview—Tariffs—Second Ordinary Tariff Revision” and “Item 5.A.  Operating and Financial Review and Prospects—Factors Affecting Our Results of Operations—Effects of Tariff Increases”.

·        The state and federal government agencies that manage water resources could 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 Basic Sanitation Law No. 11,445/2007 also allows municipalities to create their own regulatory agencies rather than being regulated by ARSESP.  As a result, a number of municipalities have created their own regulatory agencies.regulatoryagencies.  If other municipalities create new agencies or retain regulatory powers, we may be subject to their regulation and to any limitations on our services that such agencies may set.  We are involved in legal proceedings that dispute the authority of these new agencies to regulate and monitor our local contracts and our operations in metropolitan regions and urban clusters instituted by the State.  We cannot foresee any changes that any such new agencies may implement regarding our business.  If any such changes are unfavorable, they could materially and adversely affect us.

We may not be able to continue providing service on current terms, or at all, in the municipalities for which we do not have formal agreements, including the 5354 for which we are renegotiating expired agreements.  In particular, the lack of formal concessions or contractual rights in these municipalities means that we may not be able to enforce our right to continue to provide services and we may face difficulties in being paid on a timely basis, or at all, for the unamortized assets.  If we are successful in renegotiating the expired agreements, or executing formal agreements with the municipalities for which we have never had agreements, those agreements may not contain terms that are as favorable as those under which we currently operate.  We cannot make any such assumption because the Basic Sanitation Law prevents us from planning, regulating and monitoring our services and it requires more stringent control by the municipalities or by ARSESP.  The municipalities for which we do not have formal agreements may choose to start providing water and sewage services directly themselves, or may run public tenders to select another provider.  They may set eligibility requirements for which we do not qualify and, if we do qualify and participate in these tenders, we may not win.

Any of these events could have a material adverse effect on our business, results of operations and financial condition.  See “Item 4.B. Business Overview—Our Operations” and “Item 4.B. Business Overview—Government Regulations Applicable to our Contracts - Contracts—Contracts for the Provision of Essential Basic Sanitation Services in Brazil.”

In the municipalities with which we did not have formal agreements by December 31, 2015,2016, we continued operating with municipal approval or with judicial support.

Municipalities may terminate our concessions before they expire in certain circumstances.  The indemnification payments we receive in such cases may be less than the value of the investments we made.

Municipalities have the right to terminate our concessions if we fail to comply with our contractual or legal obligations or if the municipality determines in an expropriation proceeding that early termination of the concession is in the public interest.  If a municipality terminates our concession, we are entitled to be indemnified for the unamortized portion of our investments. 

The Basic Sanitation Law provides that on early termination of a concession, the entity that provides sanitation services should carry out a valuation of the assets that relate to the services provided, in order to calculate the unamortized portion of its investments.  This valuation uses the criteria defined in the service contract or, in the absence of a contract, is based on customary practice with respect to the services for the preceding 20 years.  The resulting indemnification payment may be less than the remaining value of the investments the sanitation service provider made.  Nonetheless, the indemnification payments may not occur voluntarily by the municipality, creating an opportunity for judicial dispute.  If faced with such a situation, there is the risk that the judicial decision will consider the indemnification as undue or set it at a lower value than that of our investments.

With regard to our operations that lack contracts or have indefinite or overdue timeframes, the Basic Sanitation Law reduced the maximum time period for payment of indemnification in such cases to four years.  This provision applies to concession agreements entered into prior to the enactment of the Basic Sanitation Law only to the extent that the concession agreement does not contain a contractual indemnification provision, or we have not otherwise

In 1997, the municipality of Santos enacted a law in order to repossesstake possession of our water and sewage systems in Santos.  We adopted the necessary judicial measures to contest this and we filed an ordinary suitcommenced legal proceedings against the municipality of Santos, after which the appellate court issued a decision in our favor.  The legal proceedings were terminatedhave ended and we continue to have continued operations in the municipality.  In September 2015, the State of São Paulo and the municipality of Santos entered into a service provision contract, with the intervention and consent of ARSESP.  Under this agreement, ARSESP exercises the duties of regulatingregulates and supervisingsupervises the provision of water and basic sanitation services in Santos, while SABESP continueswe continue to be responsible for the provision of water and basic sanitation to the municipality of Santos for the next 30 years.

Other municipalities may seek to terminate their concession agreements before the contractual expiration date.  If this occurs and we do not receive adequate indemnification for our investments, or the indemnification is 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, 2015,2016, our total accounts receivable was R$4,817.45,225.5 million.  Of this amount, certain municipalities to which we provide water on a wholesale basis owed us R$2,311.32,419.5 million, and certain municipal government entities owed us R$710.4800.4 million.  Of the total amount owed by municipalities, R$237.8291.9 million was overdue by between 30 and 360 days and R$2,047.72,092.3 million was overdue by over 360 days.

The Brazilian courts are entitled to obligate us to continue to supply water to these municipalities, even when we have not received payments due to us.  We have no way of ensuring that negotiations with these municipalities or legal action taken against the municipalities will result in payments being made.  SomeFor example, the municipalities of Santo André, Guarulhos and Mauá owe us significant sums in respect of water that we have been providing to them on a wholesale basis.   Although we have intensified the process of collecting these sums and other amounts, and we executed Protocols of Intentions with Santo André, Guarulhos and Mauá in late 2015 and early 2016 seeking to resolve the outstanding amounts and restore normal commercial relations with them, the negotiations with Mauá and Santo André broke down in June 2016, while the negotiations with the municipality of Guarulhos broke down in August 2016.  In those three cases, the Protocol of Intentions was terminated.  For more information on wholesale operations, see “Item 4.B. Business Overview—Our Operations—Description of Our Activities—Wholesale Operations”.  In addition, some entities associated with municipal 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 tothey owe us.  If thethese municipalities and related entities do not pay the amounts owed tothey owe us, we may experience asuffer further material adverse effect onharm to our financial position.

Aiming to revolve existing debts with the municipalities to which we provide water on a wholesale basis, in 2015 we intensified the process of collecting the debts for the provision of water and basic sanitation through the Single Registry of Debtors of São Paulo (Cadastro Único de Devedores de São Paulo), or State CADIN.  With regard to three municipalities to which we provide water on a wholesale basis, Santo André, Guarulhos and Mauá, in October 2015 and January 2016 we had executed Protocols of Intentions with each of them, to prepare studies and evaluations aimed at resolving commercial relations and exiting debts between these municipalities and us.

For more information on wholesale operations, see “Item 4.B. Business Overview—Our Operations—Description of Our Activities—Wholesale Operations”.

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

Our capital expenditure program will require resources of approximately R$12.5 13.9billion in the period from 20162017 through 2020.2021.  In 20152016 we recorded R$3.5 3.9billion in capital expenditures.

In addition to cash generated by our operations, we have funded and intend to continue funding these capital expenditures with issuances of debt securities in the domestic and international capital markets as well as borrowings in Brazilianreais and foreign currencies.  A significant portion of our financing needs is obtainedthrough long‑term financing at attractive interest rates from Brazilian federal public banks, multilateral agencies 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

Furthermore, Brazilian public and private financial institutions are legally limited up to a certain percentage of their shareholder’s equity to provide loans to public sector entities, including, for example, us.  These limitations could adversely affect our ability to continue our capital expenditure program.

Our debt includes financial covenants that impose indebtedness limits on us.  Our failure to comply with these covenants could seriously impair our ability to finance our capital expenditure program, which could have a material adverse effect on us. For further information on these covenants, see “Item 5.B. Liquidity and Capital Resources—Capital Sources—Indebtedness Financing—Financial Covenants”. 

Compliance with environmental laws and environmental liability payments could have a material adverse effect on us.

We 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 set potable water standards and limit or prohibit the discharge or spillage of effluent produced in our operations, particularly raw sewage.  We occasionally suffer accidents such as leakages or breaks in pipes that could lead to liability for damages under environmental law.  We could be subject to various types of criminal, administrative and civil proceedings for non‑compliance with environmental laws and regulations that could expose us to penalties and criminal sanctions, such as fines, closure orders and significant indemnification obligations.  The scope and enforcement of environmental laws in Brazil are becoming more stringent, and our capital expenditures and environmental compliance costs may increase substantially 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 more stringently than in the past, which may result in fines or liability for damages that are significantly higher than those we currently anticipate.  We are party to various environmental proceedings that could have a material adverse impact on us, including civil processes and investigations relating, among others, to the release of untreated sewage into waterways andor the disposal of sludge generated by treatment plants.  WeMore recently, we are also involved in proceedings challenging the extraction of water resources in the face of the currentrecent water crisis.  Any unfavorable judgment in relation to these proceedings, or any material unforeseen environmental liabilities, may have a material adverse effect on us.  For further information on these proceedings, see “Item 8.A. Financial Statements and Other Financial Information—Legal Proceedings”.  For further information on investments in environmental programs, see “Item 4.A. History and Development of the Company—Main Projects of our Capital Expenditure Program”, “Item 4.B. Business Overview—Sewage Treatment and Disposal”, “Item 4.B Business Overview—Environmental Matters” and “Item 4.B. Business Overview—Environmental Regulation”.  For further information on the Water Crisis, see “Item 4.B. Business Overview—The CurrentRecent Water Crisis”.

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

Current federal, state and municipal laws and regulations on climate change establish global goals, which we will have to meet, concerning greenhouse gas emissions and this may require us to increase our investments in order to comply with these laws.  Currently, such goals have not yet been established for the sanitation sector, however, if we increase our capital expenditures for this purpose, we may be required to reduce expenditures on other strategic investments.

In addition, climate change may lead to increased frequency of extreme weather events such as droughts or torrential rain, which may affect our ability to deliver our services and require us to strengthen our actions such as:

·          investing in seeking new water sources located further from major consumer centers;

·          investing in new technologies;

We may be required to adopt new norms to improve our energy use efficiency and minimize the release of greenhouse gases when we renew the environmental licenses for the systems already in operation or when we obtain environmental licenses for new enterprises.

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 extreme weather events, any of which could have a material adverse effect on our results of operations.

For more information, see “Item 4.B. Business Overview—Environmental Matters—Climate Change Regulations:  Reduction of Greenhouse Gases (GHG) Emissions” and “Item 4.B. Business Overview—Energy Consumption”.

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

We are party to a number of legal proceedings involving significant monetary claims.  These legal proceedings include, among others, civil, tax, labor, corporate and environmental issues.  As of December 31, 2015,2016, the total value of all outstanding claims against us was R$47,936.854,038.8 million (net of R$386.3434.2 million in escrow deposits).  A substantial monetary judgment against us in one or more of these legal proceedings may have a material adverse effect on our financial condition.  We have provisioned a total aggregate amount ofrecorgnized provisions totalling R$1,082.21,173.1 million (net of escrow deposits) as of December 31, 20152016. For more information, see note 19 to cover probable losses related to legal proceedings.  This provision doesour financial statements included in this annual report.  These provisions do not cover all legal proceedings involving monetary claims filed against us and it may be insufficient to cover our liabilities related tothe ultimate resolution of these claims.  Any unfavorable judgment in relation to these proceedings may have a material adverse effect on us.  For more information, see “Item 8.A. Financial Statements and Other Financial Information—Legal Proceedings”.

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 from emerging markets such as Brazil 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 thanmajorthanmajor 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 51% 55%of the aggregate market capitalization of the BM&FBOVESPA as of December 31, 2015.2016. 

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.  The custodian’s certificate of registration or any foreign capital registration obtained by a holder may be affected by future legislative changes, and additional restrictions applicable to the holder, the disposition of the underlying common shares or the repatriation of the proceeds of disposition may 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 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 certain requirements are met, a holder may face more difficulty in protecting his or her interests in the case of actions by our directors, officers or our controlling shareholder than 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, since the State may only be able to pay a judgment if it is provided for in its budget in a subsequent fiscal year.  None of the public property of our controlling shareholder is available for seizure or attachment, either prior to or after judgment.

Mandatory arbitration provisions in our bylaws may limit the ability of a holder of our ADSs to enforce liability under U.S. securities laws.

Under our bylaws, any disputes among us, our shareholders and our management with respect to theNovo Mercado rules, Law No. 6,404 of December 15, 1976, as amended (“Brazilian Corporate Law”) and Brazilian capital markets regulations will be resolved by arbitration conducted pursuant to the BM&FBOVESPA Arbitration Rules in the Market Arbitration Chamber.  Any disputes among shareholders and ADR holders, and any disputes between us and our shareholders and ADR holders, will also be submitted to arbitration.  As a result, a court in the United States might require that a claim brought by an ADR holder predicated upon the U.S. securities laws be submitted to arbitration in accordance with our bylaws.  In that event, a purchaser of ADSs would be effectively precluded from pursuing remedies under the U.S. securities laws in the U.S. courts.  However, a court in the United States couldallow claims predicated upon the U.S. securities laws brought by holders who purchased ADSs on the NYSE to be submitted to U.S. courts.

We also provide water and/or sewage services to 4four other municipalities through special purpose companies.  In addition, we provide consulting services regarding the rational use of water and financial, commercial and operational management in Panama, Honduras and Nicaragua.  We serve Panama and Honduras through an agreement with the consultancy firm Latin Consult.  We also have twothree partnerships with otherprivate companies:  Aquapolo Ambiental S.A., a joint venture with a private sanitation services operator, and Attend Ambiental S.A., a joint venture with Estre Ambiental and Paulista Geradora de Energia S.A.  Aquapolo Ambiental S.A. commenced operations in the second half of 2012 and operates the largest water recycling facility in the southern hemisphere.  Aquapolo Ambiental S.A. has the capacity to supply up to 1,000 liters per second to industries in the Capuava petrochemical cluster of the São Paulo metropolitan region.  Attend Ambiental S.A. commenced operations in the second half of 2014 to operate a pre-treatment plant for non-domestic effluent in the São Paulo metropolitan region.  Paulista Geradora de Energia S.A., which was formed in 2015, focuses on the implementation and commercial exploration of water potential in small hydroelectric power plants, located at Vertedouro Cascata and the Guaraú Water Treatment Station, with a total capacity of 7 MW.  We were planning to commence operations in the course of the second semester of 2017, but the current economic situation in Brazil has reduced the availability of credit, and therefore the commencement of operations was rescheduled to the second half of 2018.  See “Note 12 to the Financial Statements - Investments”.  In addition, we provide consulting services regarding the rational use of water, the updating of institutional models, and commercial and operational management in Panama, through a consortium.  We previously provided consulting services to Honduras and Nicaragua, but these consulting services have been completed.

The State of São Paulo, our controlling shareholder, is required by State Law No. 11,454/2003 to own at least 50% plus one of our common shares.  As of April 22,  2016,30, 2017, the State owned 50.3% of our outstanding common shares.  As a mixed capital company, we are an integral part of the State governmental structure.  Our strategy and major policy decisions are formulated in conjunction with the State Secretariat for Sanitation and Water Resources as part of the State’s overall strategic planning.  The majority of the members of our board of directors and our board of executive officers are nominated by the State government.

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

Our results of operations and financial condition are generally affected (i) by our ability to raise tariffs, control costs and improve productivity,productivity; (ii) the general economic conditions in Brazil and abroad; and (iii) climate conditions.  In order to supply water to the São Paulo metropolitan region, we use water from eight systems, most of which were affected by the most severe drought in our service region in the last 85over 80 years, of which occurred during 2014 and 2015.  Of those, the Cantareira System, our largest water system, was the most affected.  As a result of the drought and the low water inflow in the Cantareira System, DAEE and ANA, since 2014, have continuously regulated the volume of water we are permitted to extract from this system, authorizing us to extract between 13 m³/s and 14 m³/s in the most drastic moments of the crisis. Until the renewal of our water right which shall occur in May 2017, the volume of water that we have been authorized to extract from the Cantareira System has been communicated to us via monthly notices according to the behavior of rainfall, water inflow, level of water in our reservoirs and our requests to extract water based on this information.  Due to the return of normal rainfall levels beginning in October 2015, as of February 2016 we have been allowed to extract 23 m³/s of water.

In order to balance supply and demand despite the restricted water availability, we adopted throughout 2014 and 2015 a series of initiatives, amongst which including:  (i) using treated water from other production systems to serve consumers originally supplied by the Cantareira system; (ii) to offer discounts (bonus) to consumers that use below average amounts of water, compared to average consumption; (iii) reducing pressure in the water distribution lines in order to decrease leakage; (iv)initiatives.  adjusting the volume of water sold to municipalities that operate their own distribution network; and (v) using pumps in order to extract water located below the intakes of the Cantareira system, from the so-called “technical reserve”.Due to the return of normal rainfall levels in the rainy season beginning in October 2015, as of January 2016 it was no longer necessary to pump water out of the technical reserve of the Cantareira system and we modified the rules for obtaining discounts (bonus) in February 2016.  In addition, as of December 2015, the time period during which water is pumped out at reduced pressure in the water distribution lines is returning to the normal nighttime period, as it was prior to the water crisis.  In March 2016, as a result of the increased level of rainfall and increased predictability ofpredictabilityof the level of water in our reservoirs, we requested to ARSESPcancelled the cancellations of our Water Consumption Reduction Incentive Program and of the Contingency Tariff.  ARSESP approved our requests in the end of March 2016 and the aforementioned policy changes shall be appliedTariff to water meter readings recorded as of May 1, 2016.

For further information on the water crisis see “Item 3.D. Risk Factors—The measures we took to mitigate the effects of the drought that occurred in 2014 and 2015 resulted in a significant decrease in the volume of water billed and revenues from services we provide and, despite the discontinuation in May 2016 of the measures that were used to face the drought, new consumption habits were incorporated and the volume of water billed and revenues from services we provide continue to be impacted by those measures.” and  “Item 4.B. Business Overview—The CurrentRecent Water Crisis”.

Operations in Brazil’s most populous and wealthy state.  The state of São Paulo, which is located in the most developed and economically active region of Brazil, is the most populous state in Brazil, with an estimated total population of 4543.5 million as of December 31, 2015.2016.  The city of São Paulo had an estimated total population of 11.1 11.7million as of the same date, while the São Paulo metropolitan region had a total population of 21.4 20.6million.  Based on its GDP, the state of São Paulo is the wealthiest state and largest economy in Brazil.  The GDP of the state of São Paulo was approximately R$1.7trillion in 2013,2015, representing approximately 32.1%26.3% of Brazil’s total GDP, according to the most recent data collected by the IBGE.  The state of São Paulo generates more revenue from water and sewage services than any other Brazilian state.

Strong Base of Contracted Business.  Between January 1, 2007 and December 31, 2015,2016, we executed 30‑year agreements with 278281 of the 364366 municipalities we serve, including an agreement with the city of São Paulo, in June 2010, and Santos in September 2015.  For the year ended December 31, 2015,2016, income from these 30‑year agreements accounted for 78.6%80.3% of our gross operating revenues (including revenues relating to the construction of concession infrastructure).

Access to low‑cost and diverse sources of financing.  Our strong cash flow generation from operations and our role as an essential public service provider places us in a privileged position in our industry to obtain low cost, long‑term financing from Brazilian public banks, and domestic and international multilateral agencies and development banks.  We do not depend on a limited number of sources of financing, but instead have access to various funding alternatives in the Brazilian and international markets to fund our working capital needs and our capital expenditure programs.

Strong corporate governance practices.  In 2002, we joined theNovo Mercado segment of the BM&FBOVESPA, which is the listing segment in Brazil with the highest corporate governance requirements.  As a result, we are committed to certain corporate governance standards that are not otherwise required by Brazilian law,which provides heightened protection to our shareholders and enhances the quality of information we disclose to the market.  From December 1, 2007 until December 2015, we were part of the BM&FBOVESPA Corporate Sustainability Index, or ISE.  Due to the need to focus the attention of all our departments to overcome the water crisis, we decided not to participate in the selection process to be a part of the ISE in 2016.2016 and 2017.

High quality operations. We believe that we adhere to high standards of service and employ the best available technology in the sanitation business to control the quality of the water we abstract, process and distribute.  Of our 16 laboratories in total, our central laboratory and 13 of our regional laboratories are accredited by the National Institute of Metrology, Quality and Technology, Standardization and Industrial Quality, or INMETRO, and comply with the ABNT NBR ISO IEC 17025 standard, thereby assuring the quality and accuracy of our test results.testresults.  Moreover, our laboratories and field teams use the latest equipment to detect substances controlled by regulations and have highly trained teams to handle contingencies and customer complaints.  We believe our technology enhances the efficiency and quality of our operations.

Improve operating efficiency and reduce water loss.  We seek to reduce both physical water loss, which results mainly from leakage; non‑physical water loss, which results primarily from inaccurate water meters installed at customers’ premises and at our water treatment facilities; and clandestine and illegal water use.  In order to achieve more consistent long‑term results, we have developed a comprehensive 12 year program to reduce our water loss rate.  The first four years of the program from 2009 to 2012 were funded byBanco Nacional de Desenvolvimento Econômico e Social, or “BNDES”.  From 2013 to 2019, part of the program will be funded by a loan granted by the government of Japan through the Japan International Cooperation Agency, or “JICA”.  In October, 2015, we asked JICA for a term extension in order conclude construction work that is within the scope of financing, due to changes in economic conditions in Brazil.  The exchange rate changed significantly last year, with the depreciation ofreal. This situation, combined with the negative impact of the current water crisis on our revenue for 2015 and the need to prioritize investment in water production, impacted our ability to invest, resulting in the need to increase the term of JICA loan.  Therefore, the period the program will be funded by the JICA  loan will extend until 2019.  For more information on the program to reduce water loss, see “Item 4.B. Business Overview— Corporate Program for Reduction of Water Loss”.