The Management of Companhia de Saneamento Básico do Estado de São Paulo - SABESP (the São Paulo State Water and Sewage Services Company) hereby submits to its shareholders the Management Report and Financial Statements for the year 2005, along with the opinions of the Independent Auditors and the Audit Committee.

SABESP, Latin America’s largest basic sanitation company, aims at enhancing its operations so as to comply with its mission, based on the impartial right to universal sanitation as part of the recovery of citizenship, health, life quality of the people and the development of São Paulo.

In 2005, as a result of the recovery of the rainfall levels, as well as the optimized operation of the Metropolitan Integrated System, it has been possible a most proper management of the water resources and of the production capacity, with recovery of the water sources and the elimination of the risk of rationing in the São Paulo Metropolitan Region. Therefore, SABESP recovered growth, seeking to overcome its major challenge: to win the duality between the business and the provision of an essential public service, obtaining a remarkable result in its operating and financial performance.

It is important to emphasize the increase of the sewage invoiced volume - 5%. As a consequence, the gross revenue with the sewage services increased from R$ 1,968.0 million in 2004 to R$ 2,286.5 million in 2005. In São Paulo Metropolitan Region alone, 81,000 new connections were made, serving 345,000 inhabitants. One of the main reasons for such increase was the Tietê Project Second Stage, which is funded with resources of the Interamerican Development Bank (IDB).

In the beginning of 2005, falling due debt was of approximately R$ 1.5 billion, 63% of which in foreign currency. With the settlement of the Eurobond in the amount of US$ 275 million by using the funds obtained from the 8th Issue of debentures, it was possible to reduce total debt exposure in foreign currency from 38% to 24% in December 2005.

The recovery of the net profit and of the EBITDA margin was also outstanding in 2005. The expressive profit of R$ 865.6 million in the year 2005 was a result of the increase in the invoiced volume of water and sewage arising from the resumption of the consumption standards, the tariffs rates adjustment and the 11.8% appreciation of the Brazilian currency to the US Dollar. There was a significant increase in EBITDA margin, which represents 46.1% in 2005 compared to 43.8% in 2004.

Law No. 12.292, which has been enacted on March 02, 2006, expands SABESP’s operating area by allowing it to operate in other states and overseas.

Mauro Guilherme Jardim Arce
Chairman of the Board of Directors