Companhia de Saneamento Básico do Estado de São Paulo – SABESP Explanatory notes to the financial statements on December 31, 1999 and 1998 In thousand reais

1 Operating context The company has for its main corporate objects the water collection, treatment and supply as well as the sanitary sewer collection and processing, providing services in 366 municipalities of the State of São Paulo, upon concession thereof. Its object also comprises the conducting of studies, projects and execution of works for enlargement and construction of new networks. 2 Presentation of the financial statements The financial statements herein presented have been prepared in conformance with the accounting principles set forth in the Brazilian Corporation Law, as well as in instructions enacted by the Brazilian Securities and Exchange Commission – CVM. These statements are identified by the expression “according to Corporation Law”. Complementary information “in constant purchasing power currency” are also shown, as permitted by the Brazilian Securities and Exchange Commission. 3 Main accounting practices 3.1 Financial statements according to Corporation Law (a) Income determination (i) Revenue from sales and services Water supply and sanitary sewer collection services not invoiced until the closing date of the balance sheet are measured and recorded in such a manner as to allow the contraposition of costs and revenues in the respective fiscal year/period. (ii) Financial expenses and revenues Financial expenses and revenues are substantially represented by interests, monetary and exchange variations arising out of financial investments, as well as loan and financing, calculated and recorded on an accrual basis. (iii) Income tax and social contribution The provision for income tax and deferred income tax on temporary differences is accrued at the base rate of 15% plus additional 10%. The social contribution on profit paid and deferred is levied at the rates of 12% and 9% respectively. (b) Financial investments Financial investments are substantially represented by Certificates of Bank Deposit – CDBs, being recorded at the investment values, added by income earned (“pro rata temporis”) until the closing date of the fiscal year/period.

(c) Allowance for doubtful debtors This allowance is accrued in an amount deemed sufficient to cover probable losses arising from non-realization of accounts receivable, being recorded as a contra account of the income under the item “selling expenses”. (d) Inventories Inventories of materials intended for consumption and maintenance of water and sewer systems are evaluated at their average purchase cost. Inventories intended for investment are shown in fixed assets at cost. (e) Other current and long term assets The other current and long term assets are shown at cost or at their realization value, including, as applicable, income earned therefrom. (f) Permanent assets Permanent assets are shown at cost, restated as of December 31, 1995, in conjunction with the following aspects: - Fixed assets depreciation, based on the straight -line depreciation method, at the rates

mentioned in Note 8. - Fixed assets revaluation conducted in 1990/1991, based on an independent auditors' report,

carried out through depreciation, disposal and write-off for the respective assets, as a contra account of the “Retained Profit” account.

- - Deferred asset amortization based on the straight-line depreciation method, in five years,

starting from the beginning of the operations. (g) Loans and financing Loans and financing are restated with basis on monetary and exchange variations, added by the respective charges incurred until the closing date of the fiscal year/period. (h) Salaries and social charges Provision for leave – constituted in accordance with the requirements of the Labor Laws (CLT) – with additions defined by collective agreements and respective social charges. Provision for long service leave – constituted proportionally by period of service up to end of period. Right acquired after the end of five consecutive years of service, and only for employees contracted up to May 14, 1974. (i) Provision for contingency This provision is accrued for coverage of eventual losses, estimated by legal consultants to be probable and having an anticipated value, being related to labor, tax, civil and commercial proceedings, in both administrative and judicial courts. (j) Other current liabilities and long term liabilities

Other current liabilities and long term liabilities are shown at their known value or liabilities, and are added, as applicable, by the corresponding charges and exchange variations. 3.2 Financial statements in a constant purchasing power currency (a) Updating rate The monetary updating of operations relating to permanent assets, shareholders’ equity, income accounts and calculation of profits and losses in monetary items was measured with basis on the variation of the Accounting Monetary Unit – UMC, taking for basis the variation of the General Prices Index – Market – IGP-M. (b) Equity accounts Amounts relating to monetary assets and liabilities shown in a constant purchase power currency are equal to those shown “pursuant to Corporation Law”, except for accounts receivable – customers, accounts payable – suppliers and contractors, which are restated so as to reflect the purchasing power or realization in a currency as of December 31, 1999, taking for basis the rate disclosed by the National Association of Investment Banks and Securities Dealers – ANBID. The permanent assets and net equity were corrected on the basis of monthly variations of the UMC, updated according to the IGP-M at December 31, 1999. (c) Income accounts All accounts have been monetarily adjusted with basis on the UMC variation, as from their initial recording month, adjusted pursuant to inflation profits and losses ascertained in relation to initial and final balances of each month for the monetary assets and liabilities, and which generated nominal financial or inflationary expenses and revenues that were deemed to reduce the respective income accounts to which they are attached. (d) Deferred income tax and social contribution Deferred income tax and social contribution were calculated with basis on rates of 25% and 9%, respectively, on the added value of properties and rights in the permanent assets generated by the result of their monetary updating, in conformity with CVM’s instructions, evidenced in the Opinion nº 99/006 issued by the Brazilian Accountants Institute – IBRACON. The effect of adopting this criterion in relation to previous periods was registered directly in net equity, under “Accumulated profits”, and is found in Note 11(a). (e) Statements of changes in shareholders’ equity and in origin and application of resources Amounts in the referred statements are shown in a constant purchasing power currency as of December 31, 1999. 4 Cash

Pursuant to Corporation Law In a constant purchasing

power currency 1999 1998 1999 1998 Cash and banks 35,032 53,622 35,032 64,402 Financial investments 150,229 2,579 150,229 3,097

185,261 56,201 185,261 67,499 5 Customers Accounts receivable from customers do not include penalties, interests or any other type of monetary adjustment arising out of late payments and can be stated as follows: Pursuant to the

Corporation Law In a constant purchasing

power currency 1999 1998 1999 1998 In cash From private customers Common list (i) 418,494 323,677 418,494 388,745 Special list (ii) 65,264 43,557 65,264 52,313 Settlements (iii) 65,310 90,787 65,310 109,038 549,068 458,021 549,068 550,096 From public entities Municipal 188,850 213,707 188,850 256,668 State (note 13) 196,475 18,545 196,475 22,273 Federal 6,652 8,275 6,652 9,939 391,977 240,527 391,977 288,880 Bulk supply – City Halls Guarulhos 109.095 62.292 109.095 74.814 Mauá 18.759 10.8874 18.759 13.072 Mogi das Cruzes 1.355 1.094 1.355 1.314 Santo André 71.483 47.382 71.483 56.907 Osasco 5.091 95.420 5.091 114.602 São Bernardo do Campo 85.008 70.809 85.008 85.044 São Caetano do Sul 2.723 2.589 2.723 3.109 Diadema 15.593 11.844 15.593 14.225 309.107 302.314 309.107 363.087 Unbilled supply 172.753 162.526 172.753 195.199 Provision for doubtful debtors Private and public (164.706) (126.595) (164.706) (152.044) Bulk supply (180.001) (159.036) (180.001) (191.007) (344.707) (285.631) (344.707) (343.051) Adjustment at present value (2.404) (3.577) 1.708.198 877.757 1.075.794 1.050.634 In long term assets Sundry customers 8.762 18.567 8.762 22.300 Statement pursuant to maturity date Pursuant to the

Corporation Law In a constant purchasing power currency

1999 1998 1999 1998 Accounts payable 406.939 390.011 406.939 468.414 Overdue up to 30 days 101.730 99.802 101.730 119.865 Overdue up to 60 days 60.124 68.124 60.124 81.819 Overdue up to 90 days 48.752 48.675 48.752 58.460

Overdue up to 120 days 35.241 40.986 35.241 49.225 Overdue more than 120 days 770.119 515.790 770.119 619.479 1.422.905 1.163.388 1.422.905 1.397.262 Provision for doubtful debtors (344.707) (285.631) (344.707) (3343.051) Adjustment at present value (2.404) (3.577) 1.078.198 877.757 1.075.794 1.050.634 . Accounts receivable from private customers refer to (i) common list – residential and small and medium companies, (ii) special list – bulk consumers, commercial companies, industries, condominiums and consumers with special invoicing features (industrial effluents, wells, etc.), (iii) settlements – payment in installments of tariff debts. . Accounts receivable from bulk supply refer to sales of “treated water” to a small number of City Halls, which, in turn, are engaged in water distribution, and payment invoicing and collection. . Unbilled supply refers to water consumption and sewer collection and treatment already performed, however not yet measured, calculated with basis on the previous month’s consumption and recorded in such a manner as to allow the contraposition of costs and revenues, on an accrual basis. . Provision for doubtful debtors: the amount of the provision supplement and write-off in the fiscal year may be shown as follows 1999 1998 Supplement Write-off Supplement Write-off From private customers/public entities

38.112 103.814 26.208 89.298

From concession holders 20.964 29.167 59.076 103.814 55.375 89.298 . In order to meet the provisions of Law no. 9430/96, specifically as far as the aspects relating to deduction of expenses of such nature are concerned, the amount of R$ 103,814 (1998 – R$ 89,298) for credits overdue for more than 180 days and of individual amounts of up to R$ 5 thousand were written off the accounting records. 6 Accounts receivable from shareholders These refer to complementat ion of retirement and leave funds paid by the company to former employees of state companies that were merged for the organization of SABESP. Such amounts shall be recovered by SABESP from the State Government, which is liable for these obligations in conf ormity with State Law nº 4.819/58. The State of São Paulo Government’s budget proposal, as approved by the State House of Representatives, includes the amounts referring to said obligation. On December 31, 1999, the company had 351 employees entitled to such benefits and 2,867 (1998 – 2,795) employees who are already receiving complementation of retirement funds. The amount paid in 1999 was R$ 66,984 (1998 – R$ 68,434). In 1999, the company received R$ 65,400 from the State Government as reimbursement for these payments. 7 Long term assets

(a) Indemnities receivable These refer to amounts receivable from indemnities arising out of discontinuance of operations in the municipalities of Diadema and Mauá (note 22(ii)). (b) Deposits in court The original values shown in the current statements refer to court deposits effected for the purpose of complying with court orders relating to labor, tax and civil proceedings to which the company is a party. (c) Tax incentives CODEC Deliberation no. 001/88, of the Council for Defense of State Capitals, set forth a Tax Incentives Coordination Committee with the purpose of providing for criteria, examining and recommending the investment of financial funds arising out of companies under the State’s stock control. The amounts recorded under “tax incentives” substantially refer to incentives to the Amazon Investment Fund – FINAM and Northeast Investment Fund – FINOR. Part of said funds relative to the year 1998 may be allocated to projects selected by the referred Committee, with expectancy of full recovery. A provision was accrued for the remainder of tax incentive balances in order to cover eventual losses in the realization thereof. 8 Fixed assets Pursuant to Corporation Law 1999 1998

Cost Accrued depreciation

Net value Net value

Annual depreciation

rates – %

In operation Water systems Lands 909,438 909,438 909,438 - Structures 2,412,498 (691,094) 1,721,404 1,792,553 4 Connections 682,112 (165,072) 517,040 529,337 5 Hydrometers 198,304 (82,955) 115,349 121,485 10 Networks 2,679,542 (492,211) 2,187,331 2,237,194 2 Others 438,804 (167,680) 271,124 336,271 2 to 20 7,320,698 (1,599,012) 5,721,686 5,911,482 Sewer systems Lands 290,204 290,204 289,681 - Structures 1,145,539 (210,518) 935,021 967,620 4 Connections 676,840 (158,028) 518,812 530,153 5 Networks 3,462,323 (534,135) 2,928,188 2,854,142 2 Others 324,601 (83,447) 241,154 273,858 2 to 20 5,899,507 (986,128) 4,913,379 4,915,454 General use Lands 102,994 102,994 103,069 - Structures 98,944 (33,218) 65,726 75,529 4 Transport equipment 100,982 (86,372) 14,610 20,678 20 Furniture & fixtures, and equipment

158,769 (91,789) 66,980

167,739 10

Lands assigned in free lease

33,267 (2,169) 31,098 31,378 2 to 20

Other 282,072 (2,272) 279,800 13,755 2 to 20

777,028 (215,820) 56,208 412,148 13,997,233 (2,800,960) 11,196,273 11,239,084 In progress Water systems 734,658 734,658 659,057 Sewer systems 1,347,602 1,347,602 1,284,155 Others 19,776 19,776 21,110 2,102,036 2,102,036 1,964,322 General total 16,099,269 (2,800,960) 13,298,309 13,203,406 In a constant purchasing power currency 1999 1998

Cost Accrued

depreciation

Net value

Net value

In operation Water systems Lands 1,302,558 1,302,558 1,284,897 Structures 3,359,405 (984,369) 2,375,036 2,482,212 Connections 962,015 (235,809) 726,206 749,021 Hydrometers 265,429 (116,070) 149,359 161,669 Networks 3,707,361 (702,756) 3,004,605 3,089,527 Others 874,654 (290,249) 584,405 555,285 10,471,422 (2,329,253) 8,142,169 8,322,611 Sewer systems Lands 416,615 416,615 415,991 Structures 1,492,041 (292,495) 1,199,546 1,245,160 Connections 953,202 (225,740) 727,462 751,070 Networks 4,823,218 (762,884) 4,060,334 3,999,570 Others 790,620 (136,420) 654,200 394,555 8,475,696 (1,417,539) 7,058,157 6,806,346 General use Lands 148,134 148,134 148,241 Structures 139,279 (48,991) 90,228 105,864 Transport equipment 143,749 (127,409) 16,340 31,302 Furniture & fixtures, and equipment

224,320 (135,411) 88,909 239,813

Lands assigned in free lease

47,377 (3,245) 44,132 44,643

Other 294,830 (2,384) 292,446 16,557 997,689 (317,440) 680,249 586,420 19,944,807 (4,064,232) 15,880,575 15,715,377 In progress Water systems 885,764 885,764 1,002,289 Sewer systems 1,609,288 1,609,288 1,902,722 Others 22,667 22,667 29,510 2,517,719 2,517,719 2,9374,521 General total 22,462,526 (4,064,232) 18,398,294 18,649,898 (a) Depreciation of revaluated assets All fixed assets were revaluated in 1990 and 1991 and have been depreciated at annual rates corresponding to the remaining useful life thereof, as defined in the respective reports which, as a rule, are in intervals up to the recorded rates presented above.

(b) Fixed assets write-off The company wrote off properties from its fixed assets in 1999 that resulted in a total loss of R$ 116,854,of which R$ 17,845 were related to the discontinuance of operations in the municipality of Mauá (note 22(ii)), R$ 72,724 were related to the group of assets in operation, as a result of obsolescence, thefts and disposal, and R$ 24,285 relating to works in progress, as a result of economically unfeasible works and projects. (c) Capitalization of interest and financial charges In compliance with Deliberation CVM no. 193, of June 11, 1996, the company capitalized the amount of R$ 73,829 (1998 – R$ 54,189) in fiscal year 1999, as a result of financial charges relating to financing of fixed assets under construction (d) Works in progress The estimate for disbursement as from 2000 referring to works for investment already contracted is of approximately R$ 540,000. (e) Depreciation – in a constant purchasing power currency In the 1999 period, a total of R$ 311,469 was ascertained relative to the depreciation supplement, resulting from the use of updated bases of the respective assets. R$ 164,798 was registered as “Accumulated profit” and R$ 146,671 in the income for the period. 9 Loans and Financing Pursuant to Corporation Law 2000 1999 Financial institution

Short term

Long term

Total

Short term

Long term

Total

Financial charges

In domestic currency Federal Gov./Banco do Brasil

99,312 2,534,422 2,633,734 86,298 2,491,013 2,577,311 Standard

Reference (UPR) + 8.5% p.a.

Debentures 413,094 413,094

20% p.a. adjustable up to 104,5% of average CDI rate

Caixa Econômica Federal 5,949 488,983 494,932 103 411,131 411,234 UPR + 5 to 9.5% p.a.

Commercial papers 100,000 100,000 Fundação SABESP de Segu-ridade Social – SABESPREV

20,000 20,000 102% of average CDI rate

Fundo Estadual de Recursos Hídricos – FEHIDRO

302 477 779 510 510

6% p.a. + Long Term Interest Rate to limit of 6% p.a.

Others, including interests and charges

27,981 2,664 30,645 30,603 2,741 23,344 UPR + 12% p.a.

153,544 3,439,640 3,593,184 207,004 2,905,395 3,112,399 1999 1998 Short

term Long term

Total

Short term

Long term

Total Financial charges

In foreign currency International Bank for Reconstruction and Development (IBRD): 1999 – US$ 148,473 thousand

56,342 209,277 265,619 38,634 173,743 212,377 Currency basket variation + US$ +

6.03% p.a.

Société Générale: 1999 – FRF 33,884 thousand

892 8,443 9,355 606 7,288 7,894 FRF + 4.75% p.a.

Interamerican Development Bank (IDB): 1999 – US$ 524,053 thousand

63,219 874,313 937,532 34,563 636,431 670,994

Currency basket variation + US$ + 3

to 7.70% p.a.

Euro Commercial Paper – BB Securities Limited

186,200 186,200

Eurobonus: 1999 – US$ 275,000 thousand

491,975 491,975 332,393 332,393 US$ + 10% p.a.

Bankers Trust Luxembourg: 1999 – US$ 250,000 thousand

447,250 447,250 362,610 362,610 US$ + 10.50 to 14.75% p.a.

Westdeutsche Landesbank Girozentrale: 1999 – US$ 30,000 thousand

53,670 53,670 US$ + 11.25% p.a.

Interests and charges 66,634 66,634 33,251 33,251 688,007 1,584,008 2,272,015 655,864 1,149,855 1,805,719 Total 841,551 5,023,648 5,865,199 862,868 4,055,250 4,918,118 In a constant purchasing power currency 2000 1999 Financial institution

Short term Long term

Total Short term Long term

Total In domestic currency Federal Gov./Banco do Brasil 99,312 2,534,422 2,633,734 103,647 2,,991,776 3,095,423 Debentures 4,13,094 4,13,094 Caixa Econômica Federal 5,949 488,983 494,932 123 493,780 493,903 Commercial papers 120,103 120,103 Fundação SABESP de Segu-ridade Social – SABESPREV

20,000 20,000

Fundo Estadual de Recursos Hídricos – FEHIDRO

302 477 779 612 612

Others, including interests and charges

27,981 2,664 30,645 24,744 3,293 28,037

153,544 3,439,640 2,593,184 248,617 3,489,461 3,738,078 In foreign currency International Bank for Reconstruction and Development (IBRD): US$ 148,473 thousand

56,342 209,277 265,619 46,401 208,669 255,070

Société Générale: FRF 33,884 thousand

892 9,443 9,335 727 8,754 9,481

Interamerican Development Bank (IDB): US$ 524,053 thousand

63,219 874,313 937,532 41,511 764,371 805,882

Euro Commercial Paper – BB Securities Limited

223,632 223,632

Eurobonus: US$ 275,000 thousand

491,975 491,975 399,213 399,213

Bankers Trust Luxembourg: US$ 250,000 thousand

447,250 447,250 435,505 435,505

Westdeutsche Landesbank Girozentrale: US$ 30,000 thousand

53,670 53,670

Interests and charges 66,634 66,634 39,935 39,935 688,007 1,584,008 2,272,015 787,711 1,381,007 2,168,718 Total 841,551 5,023,648 5,865,199 1,036,328 4,870,468 5,906,796

(a) Federal Government/Banco do Brasil Existing contracts with Caixa Econômica Federal (Federal Savings Bank) were refinanced in 1994, said Bank having assigned its credit rights to the Federal Government. Under the terms of the contract entered into with the Federal Government, charges and payments are effected under the Price (monthly) system, with final maturity date in 2014. The guarantor of such financing is the State of São Paulo Government through its own revenues and SABESP’s revenues. (b) Debentures A public placement of simple debentures, not convertible into stock, was carried out by the company in March, 1999, as per an “Initial Offer” announcement published in Gazeta Mercantil on

March 19 and 22, 1999, and respective Public Offer Prospectus prepared in accordance with the National Association of Investment Banks ANBID’s Self-Regulation Code. A total of 413,094 debentures were placed in the unit face value of R$ 1, totaling R$ 413,094, with final redemption date in November, 2002, as follows: . 1st, 2nd and 3rd series – R$ 115,000 each series . 4th series – R$ 51,700 . 5th series – R$ 16,400 The issue was made on the basis of National Monetary Council (CMN) Resolution no. 2.559/98. The company contracted swap operations of the original interest rate of 20% p.a. for 104.5% of Interfinancial Depository Certificate (CDI), without alteration of terms and conditions and with no legal connection with the swap operations. These debentures will be paid at 104.5% of CDI. The resources thus obtained were used in payment of 80% of the debt of US$ 275,000 thousand with Bankers Trust Luxembourg in March 1999. (c) Caixa Econômica Federal (Federal Savings Bank) Pró-Saneamento (Pro-Sanitation) Program (i) Water and sewer Several contracts were executed in 1996, 1997 and 1998, under the Pro-Sanitation Program, for the purpose of enhancing and improving the water supply and sanitary sewer system involving several municipalities in the State of São Paulo and the Capital. Such contracts are guaranteed by the revenue earned from payments of daily water and sewer tariffs, up to the total debt amount. The amortization term provided for in the contracts is from 120 to 180 months, as from the beginning of the return stage. The balance on December 31, 1999 was R$ 492,982 (1998 – R$ 411,234), the proceeds to be used out of such contracts during the grace period being R$ 53,366. Contract expenses are: 1996 1997 1998 Interest rates 9.5% p.a. 6.5% to 8.0% p.a. 6.5% to 8.0% p.a. In the grace period: Risk rate 1.0% on the

disbursed amount 1.0% on the

disbursed amount 0.6% p.a. on the

outstanding balance Management fee 0.12% p.m. on the

contract value 2.0% p.a. on the

disbursed amount 2.0% p.a. on the

disbursed amount In the return stage: Management fee Difference between

the calculation of the installment at the rate of 10.5% p.a. less at the rate of 9.5% p.a.

1.0% p.a. on the outstanding balance

1.0% p.a. on the outstanding balance

(ii) Pró-Sanear

Contracts were executed in 1997 and 1998 relating to the Pró-Sanear Program for the performance of improvements in water and sewer services, with the community’s participation, in several municipalities of the Metropolitan Region of São Paulo. These contracts are guaranteed by the revenue from payment of water and sewer tariffs, up to the total debt amount. Initial disbursement began in August 1999. The amortization term is 180 months as from the end of the grace period. The balance on December 31, 1999 was R$ 1,950, the proceeds to be used out of these contracts, relating to works already in progress, is R$ 8,009 thousand. Estimated financial charges: Interest rate – 5% p.a. Management fee (grace period) – 2.0% p.a. on the outstanding balance Management fee (amortization period) – 1.0% p.a. on the outstanding balance Risk rate – 1% on the disbursed amount (grace period) (d) Commercial Papers In December 1999, 200 Commercial Papers were recovered, having been issued in December 1998 in a single series with unit value of R$ 500. The face value of the issue was R$ 100,000, and the net value received was R$ 96,000, according to authorization granted by the Brazilian Central Bank (BACEN) and according to CMN Resolution no, 2,259 of November 5, 1998. (e) IBRD (International Bank for Reconstruction and Development) Agreement 3.102 – Executed in February, 1990, in the amount of US$ 280 million, for the purpose of improving the company’s operating efficiency. The amortization period started in September, 1994, at an annual financing interest rate of 0.5% above the cost of qualified drawdowns in the semester preceding that of the assessment period, with final maturity date in March, 2004. A guarantee agreement was executed on the same date between the Republic of Brazil and the IBRD, guaranteeing the provision of funds for compliance with the obligations set forth in the loan agreement. Agreement 3.504 – For the purpose of transferring funds from the “mother” agreement executed between the State of São Paulo and the IBRD in December, 1992, intended for the execution of the environmental sanitation program of the Guarapiranga Basin, an on-lending agreement was executed between the State of São Paulo and SABESP, in March, 1993. The amount of funds released to the company until December 31, 2000 was US$ 37,618, with remaining proceeds to be used in the amount of US$ 4.847. A guarantee agreement was executed in December, 1992 between the Republic of Brazil and the IBRD, guaranteeing the provision of funds for the compliance with the obligations provided for in the financing agreement. The agreement is being currently repaid within the grace period in semiannual installments, since October, 1997 and is scheduled to expire in April, 2007. The interest rate is 0.5% p.a. above the IBRD’s funding cost. (f) IDB (Interamerican Development Bank) Agreement 229 – Executed in June, 1987, in the amount of US$ 163 million, intended for the execution of the sewer program in the Metropolitan Region of São Paulo. The amortization period started in January, 1994, in semiannual installments, at an annual interest rate of 7.7%, with final maturity date in July, 2007. A guarantee agreement was executed in June, 1987, between the Republic of Brazil and the IDB, guaranteeing the provision of funds for the compliance with the obligations provided for in the financing agreement.

Agreement 713 – Executed in December, 1992, in the amount of US$ 400 million, intended for the execution of the Tietê River depollution project – first stage. The amortization period started in June, 1999, in semiannual installments, at an interest rate varying in accordance with the costs of loans borrowed by the bank on a semiannual basis and with final maturity date in December, 2017. A guarantee agreement was executed in December, 1992, between the Republic of Brazil and the IDB, guaranteeing the provision of funds for the compliance with the obligations provided for in the financing agreement. Agreement 896 – Executed in December, 1992, in the amount of US$ 50 million, also intended for the Tietê River depollution project – first stage. The amortization period started in June, 1999, in semiannual installments, at an interest rate of 3% per year, with final maturity date in December, 2016. A guarantee agreement was executed in December, 1992, between the Republic of Brazil and the IDB, guaranteeing the provision of funds for the compliance with the obligations provided for in the financing agreement. (g) Euro bonus A foreign credit transaction was closed in July, 1997, having as lead manager “UBS – Securities LLC” and as co-managers “Deutsche Morgan Grenfell” and “BB Securities”, in the amount of US$ 275,000 thousand, at an annual interest rate of 10%, with final maturity date in 2005. Such funds were allocated to the advanced release of debentures. (h) Syndicated loans (i) Bankers Trust Luxembourg During 1999, new loan agreements were closed in foreign currency with the aim of refinancing the following obligations:

Date (1999) Maturity (2000) million US$ Interest p.a. (%) May May 180 14,75 August February 20 11,375 December December 50 10,50 (ii) Westdeutsche Landesbank Girozentrale An unguaranteed foreign currency loan operation to the value of US$ 30,000 was carried out in October 1999, with the aim of refinancing financial obligations, with interest rates of 11.25% p.a. and maturity in October 2000. (h) Maturity Dates Maturity dates of loans and financing are as shown below:

2000

2001

2002

2003

2004

2005 From

2006 on

Total In domestic currency

153,544 129,208 554,384 153,644 167,128 181,799 2,253,477 3,593,184

In foreign currency

688,007 120,579 120,717 120,867 85,237 563,411 573,197 2,272,015

841,551 249,787 675,101 274,511 252,365 745,210 2,826,674 5,865,199

10 Taxes and contributions

Pursuant to Corporation Law Short Term Long Term 1999 1998 1999 1998 Income tax and social contribution 24,202 Income tax and social contribution – installments

83,918 69,651 160,842 204,528

Cofins and Pasep 7,722 15,376 Cofins and Pasep – installments 29,998 37,854 2,559 27,961 INSS (Social Security) 10,077 10,957 Others 1,378 6,004 157,295 139,842 163,401 232,489 In a constant purchasing power currency Short Term Long Term 1999 1998 1999 1998 Income tax and social contribution 24,202 Income tax and social contribution – installments

83,918 83,652 160,842 245,644

Cofins and Pasep 7,722 18,467 Cofins and Pasep – installments 29,998 45,464 2,559 33,581 INSS (Social Security) 10,077 13,160 Others 1,378 7,211 Total 157,295 167,954 163,401 279,225 (i) Legal processes The company has requested the full deduction of the negative basis of the social contribution and tax loss carryforward, without the 30% limit provided for in Law 8.981/95. The negative basis of the social contribution accrued on December 31, 199 is R$ 143,641, on which a corresponding tax credit has been booked (note 11). By means of a common action, with petition for anticipated protection, the company is questioning the system introduced by Law no. 9,718/98, which broadened the calculation base of the Social Security Contribution (COFINS) and the Public Officer Equity Formation Program (PASEP) and increased the COFINS calculation rate. The petition for anticipated protection was deferred on June 11, 1999, without legal deposit. The calculated differences, according to the current law and the values actually collected on the basis of the previous law, to the total of R$ 21,651, were provisioned and are registered in current liabilities. 11 Income tax and social contribution

Pursuant to theCorporation Law

In a constant purchasing

power currency 1999 1998 1999 1998 In long term assets Deferred income tax 8,040 8,040 Deferred social contribution 12,928 12,928 20,968 20,968 In current liabilities Income tax 29,142 29,142

Social contribution 29,142 29,142 In long term liabilities Deferred income tax 327,391 331,103 1,467,797 397,664 Deferred social contribution 15,713 426,259 343,104 331,103 1,894,056 397,664 In income For the fiscal year Income tax (29,142) (59,533) (29,142) (71,897) Deferred income tax (35,609) (90,207) Reversal Deferred income tax 47,361 47,267 52,013 56,959 (17,390) (12,266) (67,336) (14,938) For the fiscal year Social contribution (7,128) (8,626) Deferred social contribution (2,786) (44,842) (2,786) (7,128) (44,842) (8,626) (a) Deferred Income tax and social contribution (i) In long term liabilities Monthly realization (1/120) referring to the difference between the Consumer Prices Index – IPC and the National Treasury Tax Bond – BTNF – Law no. 8200/91 and inflation income, in the amount of R$ 47,361 (1998 – R$ 47,267). In addition, as mentioned in note 3.2(d), for purposes of statement in a constant purchasing power currency, the company’s management calculated and recorded deferred income tax and social contribution on the added value of the permanent assets arising out of monetary adjustment thereof, in accordance with the following parameters: Accumulated Previous

periods Calculation basis for tax effects over adjustments to permanent assets (excluding lands)

4,561,623 2,335,047

For Income tax – 25% 1,140,406 583,762 For Social contribution – 9% 410,546 186,804 1,550,952 770,566 Effect in the fiscal year Over income 99,960 Over shareholders’ equity 680,426 770,566 Total effect over shareholders’ equity and long term liabilities 1,550,952 (ii) In long term assets Substantially calculated on temporary differences and accumulated tax losses in the amount of R$ 8,040 and R$ 12,928, respectively with realization estimated for 2001 fiscal year. 12 Pension and assistance plans The company sponsors Fundação Sabesp de Seguridade Social – SABESPREV, an entity organized in August, 1990 with the main purpose of administering SABESP’s complementary pension plans and assistance program for its employees.

The company’s monthly contributions related to the pension plan (defined benefit) correspond to not less than the difference between the total rate, as determined by the actuarial evaluation of a legally qualified expert, and the participants’ contribution percentile and inter-program transfers, which were the following in the fiscal year: . Company’s contributions: 2.10% (1998 – 2.10%) on the payroll; . Participants’ contributions: 2.10% (1998 – 2.10%) on average, corresponding to the application to their monthly salaries of percentiles ranging from 1% to 8.5%; . Inter-program transfers: 1.13% (1998 – 1.13%) on the payroll. In addition, the company’s contributions include the liability undertaken with reference to periods preceding the organization of the SABESPREV, which is demandable until 2011. The amount of said liability, defined by actuarial calculation, of R$ 10,112 (1998 – R$ 10,362), is duly recorded in the current liabilities and in the long term liabilities, as appropriate in accordance with the realization date. The assistance program, which comprises elective plans, is also maintained by contributions from both sponsors and participants, which in the fiscal year were as follows: . Company’s contributions: 6.21% (1998 – 6.21%) on average, on the payroll; . Participants’ contributions: (i) R$ 3.49 (1998 – R$ 3.49) multiplied by the monthly number of meal vouchers issued, (ii) 2.25% (1998 – 2.19%) on average, on the payroll. 13 Transactions with related parties Pursuant to the

Corporation Law In a constant purchasing

power currency 1999 1998 1999 1998 In current assets Accounts receivable from shareholders (note 6)

184,239 182,599 184,239 219,306

Customers (note 5) 196,475 18,545 196,475 22,273 Transaction – in income (*) Sales of products 233,391 246,175 233,291 295,663 (*) These refer to operations of sales to State Government entities, carried out in equal conditions as those conducted with third parties, except for the form of settlement of credits, which may be performed in similar conditions to those mentioned in the next item. Memorandum of Understanding with the State of São Paulo Government The company and the State of São Paulo Government, through the State Department of Finance, executed a Memorandum of Understanding on September 30, 1997, which aimed at equating the balance of credits receivable for sales and services rendered by the company to the use, as applicable, of dividends and/or interests on own capital. 14 Provisions for contingencies The company’s management, based on a joint analysis with its legal counsels, booked a provision deemed to be sufficient to cover probable unfavorable judgments against the company, in claims in

process in administrative and judicial courts relating to the amount of R$ 26,786 (1998 – R$ 26,930), which was recorded in long term liabilities under “Provision for contingent liabilities”. 15 Shareholders’ equity (a) Authorized capital stock The company is authorized to increase its capital stock up to the limit of R$ 4,100,000, corresponding to 40,000,000,000 common shares without certificate (book-entry shares) and without face value. (b) Subscribed and paid-up capital stock The subscribed and paid-up capital stock comprises 28,437,155,323 (1999 – 27,857,339,553) registered common shares, without face value, distributed as follows: 1999 1998 Shareholders Number % Number % State of São Paulo Treasury Department

24,293,934,178 85,43 18,146,480,818 65,14

Cia. Paulista de Administração de Ativos – CPA

6,147,453,360 22,06

State of São Paulo Department of Water and Electric Power

862,999,886

3,03 862,999,886 3,09

Shares in Custody with Stock Exchanges

2,874,856,614 10,11 2,425,585,359 8,70

Others 405,364,645 1,43 274,820,553 1,01 28,437,155,323 100,00 27,857,339,553 100,00 (c) Right to shares Payment of a minimum mandatory dividend of 25% on the net profit is assured to the shareholders, to be adjusted in accordance with Corporation Law. (d) Reevaluation reserve As provided in CVM Instruction no. 97/93, the company chose not to register income tax and social contribution on the reevaluation reserve for fixed assets, established up to 1991. If this were accounted, it would generate a tax liability (not payable) of R$ 711,498 (1998 – 757,332). The reserve has been realized against accumulated profits, in the same proportion as the depreciation and write-off of the respective assets to which it is related. (e) Interests on own capital A provision was booked in 1998 for interests on own capital, calculated in conformity with article 9 of Law no. 9249/95, with due regard to the Long Term Interest Rate – TJLP. For purposes of deduction upon calculation of income tax and social contribution, they were recorded in the “Financial expenses” account and then, for financial statements purposes, in compliance with Deliberation CVM no. 207/96, were shown in shareholders’ equity. 16 Conciliation between net profit (loss) for the fiscal year and shareholders’ equity, ascertained in accordance with Corporation Law and in a constant purchasing power currency

Net profit (loss) for the fiscal year

Shareholders’ equity

1999 1998 1999 1998Pursuant to Corporation Law (235,448) 542,156 8,271,543 8,424,523 Monetary adjustment To permanent assets 2,792,642 316,153 5,126,294 4,496,345 To shareholders’ equity (2,001,254) (114,813) Adjustment at present value – net (1,416) 2,158 (2,015) (2,946) Reversal (provision) of taxes Income tax (56,331) (1,140,406) Social contribution (43,629) (410,546) In a constant purchasing power currency

454,564 745,654 11,844,870 12,917,922

Gains and losses in monetary items Assets 1999 1998 Allocation account Current assets Cash and banks (7,761) (463) General expenses Financial applications (19,855) (3,157) Financial income Customers (116,437) 50,473 Financial income Accounts receivable from shareholders

(36,822) (3,612) Personnel expenses

Anticipated payments (803) (529) Personnel expenses Inventories (11,267) 5,166 Materials expenses Other accounts receivable (12,853) 2,723 Financial income (205,798) 50,601 Long term assets Customers 2,578 11,604 Financial income Income tax and social contribution (6,159) Financial expenses Others (6,210) 305 Financial expenses (9,791) 11,369 Total losses (215,589) 61,970 Liabilities 1999 1998 Allocation account Current liabilities Suppliers and contractors 7,271 21,129 Financial expenses Loans and financing (189,546) (63,559) Financial expenses Salaries and payroll charges 9,449 768 Personnel expenses Provisions for leave, long service leave and social charges

25,797 2,595 Personnel expenses

Interests on own capital payable 15,308 659 General expenses Taxes and contributions 26,267 12,038 Financial expenses Other accounts payable 10,792 1,276 Personnel expenses (94,662) (25,094) Long term liabilities Loans and financing 142,688 (294,790) Financial expenses Deferred income tax and social contribution

64,762 7,967 Financial expenses

Taxes and contributions 40,294 3,033 Financial expenses Other accounts payable 11,623 746 Personnel expenses 259,367 (238,044)

Total gains 164,705 (308,138) Monetary gains (losses), net value (50,884) (246,168) 17 Insurance coverage The insurance policies carried by the company provide the following coverage, according to risks and nature of properties: 1999 Insurance type Insured amount Fire 12,066 Sundry risks 1,516 Civil liability – works 28,564 Engineering risk 264,789 Civil liability – operations 921 18 Financial instruments (a) General considerations The use of these instruments and of derivative operations involving interest rates has the aim of protecting the income of the company’s asset and liability income. The operations are realized through the financial operations area in accordance with the strategy previously defined by the board. The management evaluates the risks as minimal, as there is no concentration of the contrary party, and the operations are realized with banks with recognized solidity, within approved limits. (b) Market value of financial instruments Market values of the company’s main financial instruments are close to book values, as shown below: Pursuant to Corporation

Law In a constant purchasing

power currency 1999 1998 1999 1998 Investments in securities 150,229 2,579 150,229 3,097 Loans and financing 5,865,199 4,918,118 5,865,199 5,906,796 The market values were calculated in accordance with the present value of such financial instruments, considering the interest rate prevailing in the market for operations with similar terms and risks. (c) Credit risk concentration A substantial portion of the company’s sales is quite well spread over a great number of customers. Credit risk, as for these customers, is minimum due to the large portfolio and the control procedures, which monitor said risk. Doubtful receivables are properly covered by a provision for eventual losses in the realization thereof.

(d) Foreign currency Foreign currency operations consist of financing intended for specific works for improvement and enlargement of the water supply and sewer collection and treatment systems. The company does not engage in hedge operations. (d) Interest rate swaps As mentioned in note 9(b), the company contracted swap operations of the original debenture interest rate of 20% p.a. for a post-fixed 104.5% of Interfinancial Depository Certificate (CDI). The financial result of these swaps is calculated at R$ 413,094, which corresponds to the face value of the debentures. 19 Appropriation of property Appropriation or institution of right-of-way in third parties’ properties became necessary as a result of the performance of priority works relating to the water and sewer systems. Such actions were performed in accordance with the applicable laws. The respective land owners shall be indemnified through judicial actions or out of court settlements. The estimated amount to be disbursed as from fiscal year 2000 is approximately R$ 118,000 (R$ 116,101 were disbursed in 1999), which shall be provided out of own resources or financed. The properties that are the subject matter of such proceedings shall be recorded in the fixed assets upon closing of the operation. 20 Gross operating revenue Pursuant to Corporation

Law In a constant purchasing

power currency 1999 1998 1999 1998Water supply 1,893,464 1,814,589 2,073,101 2,186,792Collection and treatment of sewage 1,290,877 1,221,007 1,412,355 1,471,396Other services 149,926 148,365 164,511 178,736Adjustment to present value, accounts receivable and unbilled supply

(40,763) (36,115)

3,334,267 3,183,961 3,609,204 3,800,809 21 Operating costs and expenses Pursuant to

Corporation Law In a constant

purchasing power currency

1999 1998 1999 1998 Costs of sales and services rendered Salaries and payroll charges 575,861 665,187 624,711 801,277 General materials 43,279 42,421 55,592 44,094 Treatment materials 37,032 35,567 40,979 42,870 Third parties’ services 136,131 158,021 142,701 182,718 Electric power 130,917 118,983 143,786 143,290 General expenses 25,963 23,953 25,165 28,786 Depreciation 414,979 377,243 594,643 454,504 1,364,162 1,421,375 1,626,577 1,697,539 Selling expenses

Salaries and payroll charges 66,087 65,669 71,631 79,092 General materials 2,678 1,670 3,464 1,735 Third parties’ services 29,840 19,215 31,078 22,221 Electric power 249 325 273 392 General expenses 16,007 15,519 15,525 18,646 Depreciation 902 625 1,284 753 Written-off credits/provision for doubtful debtors

162,890 144,673 176,123 174,338

278,653 247,696 299,378 297,177 Administrative expenses Salaries and payroll charges 74,145 93,991 80,103 113,267 General materials 1,828 2,206 2,335 2,293 Third parties’ services 37,454 54,197 39,344 62,701 Electric power 313 474 343 571 General expenses 7,177 7,334 6,784 8,814 Depreciation and amortization 18,187 22,291 27,142 26,861 Tax expenses 14,663 14,047 15,933 16,936 153,767 194,540 171,984 231,433 Financial expenses Interests, fines and default interests on Loans and Financing – domestic currency

337,996 229,456 370,204 276,567

Interests, fines and default interests on Loans and Financing – foreign currency

222,888 121,803 247,221 146,727

Interests on Own Capital 514,541 619,374 Interests on Own Capital (reversal) (514,541) (619,374) Monetary Variation on Loans and Financing 151,012 206,958 Exchange Variation on Loans and Financing 852,026 168,901 Reversal of adjustment to present value of suppliers and contractors

5,570 13,994

Gains and losses (116,502) 309,665 Others 76,283 55,947 79,641 91,453 1,640,205 783,065 586,134 838,406 Financial income Monetary variations 89,913 76,883 Income from financial investments 23,584 24,113 25,383 29,077 Reversal of the adjustment to present value of accounts receivable and unbilled supply

- 41,937 39,002

Gains and losses - (144,449) 57,364 Others 810 762 872 920 Sub-total 114,307 101,758 (76,257) 126,363 COFINS and PASEP (4,033) (5,765) 110,274 101,758 (81,765) 126,363 22 Concessions (i) Municipality of Osasco As of December 1999, Sabesp took on the basic sanitation services for the municipality of Osasco, in the western region of Greater São Paulo. The transfer of services from the Department of Water and Sanitation (DAE) was approved by the municipal legislature on April 20, 1999. The economic value of the deal – R$ 231,181, as calculated by the independent auditors’ – was deducted from the

sum of R$ 168,933 related to sums receivable (updated to the sum of R$ 43,603, registered in the 1999 results) resulting from supply of water to that municipality. (ii) Recommenced concessions – Municipalities of Diadema and Mauá The Municipalities of Diadema and Mauá terminated the concessions of water supply and sewer collection services in the beginning of 1995. In December, 1996 the company filed an action for indemnity seeking repayment of the investments carried out during the effective term of the concession agreements. Although not yet repaid for the respective amounts, the company continues supplying treated water, in bulk, to the mentioned municipalities, which currently operate the water and sewer systems. The residual book value of fixed assets related to the Municipality of Diadema, written-off in December, 1996, was R$ 75,231, and the balance of indemnity and other credits receivable from the municipality, in the amount of R$ 62,876, is recorded in the long term assets in the “Indemnities receivable” account (1998 – in current assets: “Other receivables”). The residual book value of fixed assets related to the Municipality of Mauá, written-off during fiscal year 1999, was R$ 103,763, and the outstanding indemnity, in the amount of R$ 85,918, is recorded in the long term assets, in the “Indemnities receivable” account. Both cases are currently under court discussion; however, it is the opinion of the legal consultant in charge for the conduction of the lawsuits that a favorable judgment may be expected by the company. In order to improve the information disclosed to the market, the company presents below, as supplementary information, the statements of cash flow prepared in accordance with NPC-20, considering the main operations that influenced the company’s cash and financial investments, and of added value, prepared in accordance with Circular Official Letter CVM no. 01/00. (a) Cash flow statement Pursuant to

Corporation Law In a constant

purchasing power currency

Description 1999 1998 1999 1998Cash flow of operating activities Net profit (loss) for the fiscal year (235,448) 542,156 454,564 745,654 Adjustment for net profit conciliation Deferred income tax e social contribution (net of R$ 680,426 with effect on shareholders’ equity)

(8,966) (47,267) 83,035 (56,959)

Residual book value of retired fixed asset s 202,772 6,830 249,200 8,220Gain in investments sale (384) (396) Depreciation 425,501 389,951 612,708 469,818Amortization 8,567 10,208 10,361 12,300Interests calculated on loans and financing payable

591,164 401,075 649,200 483,509

Monetary and exchange variations of loans and financing

1,036,334 375,859

Gains (losses) Loans and financing - 46,858 358,349Deferred income tax and social contribution - (58,603) (7,967) 2,019,54 1,678,812 2,046,927 2,012,924

Assets (increase) reduction Customers (short term) (200,441) 3,007 (25,161) 19,713Accounts receivable from shareholders (1,640) (18,975) 35,067 (19,262)Anticipated payments 906 5,272 1,884 6,767Inventories 6,082 (38,346) 19,727 (45,419)Other accounts receivable 55,894 2,503 68,344 4,396Customers – long term 9,805 (15,510) 13,538 (18,563)Indemnities receivable (148,794) (148,794) Court deposits (1,948) (2,690) 1,063 (2,967)Tax incentives 9,463 (9,933) 12,634 (11,804)Compulsory loans and other 3,039 (497) 3,853 (520) (267,634) (75,169) (17,845) (67,659) Pursuant to

Corporation Law In a constant

purchasing power currency

Description 1999 1998 1999 1998Liabilities increase (reduction) Suppliers and contractors (105,533) 28,490 (135,028) 32,373Salaries and payroll charges (35,063) 10,735 (53,811) 11,114Provisions for leave, long service leave and social charges

12,809 2,228 (9,469) 335

Interests on own capital payable 226,175 (216,851) 221,391 (261,756)Taxes and contributions 17,453 (21,556) (10,659) (29,369)Other accounts payable (4,691) (7,713) (10,807) (10,086)Taxes and contributions (69,088) (46,037) (115,824) (61,296)Other long term accounts payable (7,174) (19,710) (18,095) (25,008) 34,888 (270,414) (132,302) (343,693)Net cash from operating activities 1,786,794 1,333,229 1,896,780 1,601,572 Cash flow of investment activities Purchase of fixed assets (642,981) (1,142,331) (686,075) (1,375,481)Increase of investments (230) (241) Sale of investments 402 423 Increase of deferred assets (11,188) (52,901) (12,758) (63,715)Net cash allocated to investment activities (653,997) (1,195,232) (698,651) (1,439,196) Cash flow of investment activities Financing – short term Funding 687,450 850,195 754,748 1,026,355 Payments (1,634,684) (1,013,548) (1,803,438) (1,220,203)Interests paid on own capital (333,940) (201,793) (354,740) (243,116) Financing – long term Funding 483,414 431,895 547,395 519,716 Payments (205,977) (331,100) (224,332) (400,442) Credits for capital increase Advance for future capital increase 13,755 16,557 Tax incentives 9,933 12,027Net cash allocated to investment activities

(1,003,737) (240,663) (1,080,367) (289,106)

Net increase (reduction) in cash and cash equivalents

129,060 (102,666) 117,762 (126,730)

Cash and cash equivalents at year beginning 56,201 158,867 67,499 194,229Cash and cash equivalents at year end 185,261 56,201 185,261 67,499Cash variation 129,060 (102,666) 117,762 (126,730) Supplementary information of cash flow Interests paid for loans and financing 531,811 347,256 582,178 418,419Paid income tax and social contribution - 114,211 139,288Fixed assets received as gift and/or paid in stock

82,468 37,667 88,174 45,699

(b) Value-Added Statement Pursuant to Corporation Law In a constant purchasing

power currency 1999 % 1998 % 1999 % 1998 % Revenues Sales of goods, products and services

3,334,267 3,183,961 3,609,204 3,800,809

Written-off credits (162,890) (144,673) (176,123) (174,338) Non-operating (124,341) 5,320 (169,861) 6,397 3,047,036 3,044,608 3,263,220 3,632,868 Outsourced raw-materials

Consumed raw-materials 37,032 35,567 40,979 42,870 Cost of goods and services sold

327,056 333,223 356,063 286,656

Materials, electric power, outsourced services and others

82,356 90,829 84,694 105,191

446,444 459,619 481,736 534,717 Gross added value 2,600,591 2,584,989 2,781,484 3,098,151 Deductions (depreciation/amortization

434,068 400,159 623,069 482,118

Net added value produced by the entity

2,166,524 2,184,830 2,158,415 2,616,033

Received as a transfer Financial income 114,306 101,758 (76,257) 126,363 Total added value to be allocated

2,280,830 1

100 2,286,588 100 2,082,158 100 2,742,396 100 Added value allocation Personnel and charges 637,062 27.9 738.193 32.3 689,381 33.1 889,198 32,4Taxes, fees and contributions

218,636

9.6 206,182 9,0 329,684 15.8 248,677 9,1

Interests 1,640,205 71.9 783,065 34,3 586,134 28.1 838,406 30,6Rentals 20,375 0.9 16,992 0,7 22,395 1.1 20,470 0,7Dividends, including interests on own capital

- - 514,541 22, - 619,374 22,6

interests on own capital Retained profits (losses) (235,448) (10.3) 27,615 1,2 454,564 21.9 126,280 4,6

* * *